A number of contributing factors include stabilization of expectations for a Fed rate hike and the BoJ's consistency in maintaining low interest rates.
The US dollar had slumped versus the Japanese yen along with its depreciation over the past week. However, USD/JPY experienced a rapid rebound on Friday and continues into today (18/January). A number of contributing factors include stabilization of expectations for a Fed rate hike and the BoJ's consistency in maintaining low interest rates. At the time of writing, USD/JPY has climbed again towards the 115.00 range.
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| USD/JPY Daily Chart via TradingView |
Expectations of the Fed's rate hikes for 2022 are now well established at about 3 times; once in March and 2-3 more times before the end of the year. The yield on the US Treasury 10Y bond also rose to near a two-year record high of 1.8550 percent. The US Treasury 2Y yield hit the 1 percent threshold for the first time since February 2020.
The strengthening of yields supports the recovery of the USD exchange rate in the forex market, especially against the Japanese yen which is very sensitive to changes in bond yields. There is a possibility for another USD correction because the accumulation of long positions in USD is still too high, but the temporary selling has subsided.
Quoted by Reuters, analysts at Goldman Sachs said, "With the Fed's 3.7 rate hikes foreseen for 2022 and 2.3 for 2023, market participants seem to conclude that the risks to policy calculations are now more balanced (in USD rates)."
Meanwhile, the results of today's meeting of the Japanese central bank (BoJ) illustrates how low expectations for future policy changes are. Inflation forecasts are still far from the target, so the direction of monetary policy remains ultra-loose.
The BoJ raised its inflation forecast, but the level remains well below its 2 percent target. Japan's inflation forecast for the one-year period starting April 2022 was only pulled up from 0.9 percent to 1.1 percent, while the forecast for 2023 was raised from 1.0 percent to 1.1 percent. In line with the lack of inflation expectations, the BoJ kept its short-term interest rate at -0.1 percent.
"Global reflation trades and rising US yields are leading to depreciating pressure on the yen," said Carlos Casanova, senior Asia economist at UBP.
"The BoJ is likely to stick to (current) policy going forward, unless the government pressures it to reduce losses from rising commodity prices exacerbated by a weak yen. That may prompt the BOJ to adjust its policy," said Izuru Kato, chief economist at Totan. Research.
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