Overview
The Japanese yen experienced a significant surge against all major currencies on Thursday, driven by a wave of risk aversion in global markets. The USD/JPY pair fell to a three-week low as investors sought safe-haven assets amidst rising concerns over AI valuations, increasing oil prices, and political unrest in France.
Market Dynamics
As risk aversion intensified, the USD/JPY pair dropped towards 157, influenced by falling US Treasury yields which narrowed the yield differential between the US and Japan. This shift in market sentiment was primarily attributed to external factors rather than domestic developments in Japan, although it coincided with the upcoming Bank of Japan (BOJ) monetary policy meeting.
Key movements included:
- EUR/JPY fell 1% to multi-month lows.
- NZD/JPY declined by 1.1%, reflecting the commodity-sensitive nature of the New Zealand dollar.
- GBP/JPY reversed gains, closing below 210.
- CHF/JPY also fell as the yen attracted more safe-haven flows compared to the Swiss franc.
Japan CPI and BOJ Meeting
Attention is now focused on Japan's inflation report, with expectations for the nationwide core Consumer Price Index (CPI) to rise to 2.1% year-on-year from 1.7%. This increase would push inflation above the BOJ's target of 2%. Recent Tokyo inflation figures indicated renewed price pressures, with core CPI rising significantly.
A stronger-than-expected CPI report could bolster expectations for further BOJ tightening, potentially providing additional support for the yen ahead of the BOJ's policy meeting next week.
BOJ's Monetary Policy Outlook
The BOJ is anticipated to maintain its current interest rate at 1.25% during the upcoming meeting, following a hike in September. However, a significant majority of economists predict a further 25 basis point hike by December, with updated inflation projections and guidance from Governor Ueda being closely monitored for insights into future policy adjustments.
Technical Analysis of USD/JPY
Recent technical analysis indicates that USD/JPY has established a lower high, suggesting a bearish trend. The recent bearish candle indicates a range expansion to the downside, following weeks of price compression. The next support level to watch is the September low, which could be tested soon.
Indicators show rising implied volatility and a bearish structure on the weekly chart, reinforcing the expectation of a potential break below the September low, with a focus on the August low as the next target.