Japanese Yen is throwing a warning Japanese Yen is throwing a warning Japanese Yen is throwing a warning

Japanese Yen is throwing a warning

Forex 6 minutes to read
Charu Chanana

Head of FX Strategy

Summary:  Yen’s slide to fresh YTD lows is a reminder of how market has potentially overpriced a hawkish Bank of Japan outcome. Comments from Deputy Governor Uchida brought the focus back to BOJ’s limits to tighten policy, and why JPY could remain a key funder in carry trades amid low volatility environments. Geopolitics and higher oil prices could also weigh on JPY, although we are in intervention-threat zone that could mean a reversal, but not a recovery.


It’s been a rather quiet week in FX markets after some early dollar strength subsided with much of the Fed pushback to easing expectations priced in. But when volatility is low, carry runs high. This could have made CHF and JPY as the underperformers for this week so far, but there were some other factors that underpinned those moves as well.

USDJPY rallied back to mid-149 levels after BoJ Deputy Governor Shinichi Uchida said yesterday that termination of the negative interest rate policy in Japan would likely be one-off, instead of the start of an aggressive rate hiking cycle. He said that overall accommodative conditions will be maintained and any actions post-NIRP exit would occur at a "gradual pace". This is something we argued earlier, and continues to suggest that any BOJ tightening will be gradual and modest.

However, yen’s overreaction is a warning sign that market may still be expecting a steeper tightening from the BOJ and may be disappointed later. This is clearly from a positioning standpoint, with yen shorts having been covering significantly since the peak in November 2023. Certainly, yen’s weakness yesterday could also have been amplified by the move higher in Treasury yields, but we continue to believe that yen will remain a key funding currency for carry trades in low volatility environments despite BOJ tightening expectations.

Our technical strategist says that the break of 148.80 resistance in USDJPY could open the doors to 152, but intervention risks are likely to come in the way above 150. This means it may be better to look at yen crosses, where AUDJPY and EURJPY remain quite interesting, but CADJPY may be in focus as well going into the weekend amid gains in oil prices and Brent crude rising above $80/barrel on lack of progress on Israel-Hamas ceasefire.

The Canadian dollar (CAD) benefits from higher oil prices as Canada is a key oil exporter, while Japan being a key energy importer means JPY suffers. CADJPY is knocking at 111 level and Sept high was at 111.17. If broken, this could open the door to 115. Canada’s January employment data is out today and expected to come in stronger at 15k vs. 0.1k in December which may mean Bank of Canada could have room to avoid an immediate pivot.

NZDJPY also in focus after a major bank said that RBNZ could hike twice more. This made AUDNZD break lower to the 1.06 handle. NZDJPY surged to its highest levels since 2014, nearing 91.50, and a break above will bring 94 in focus.

US CPI revisions will also be key to watch today. Any downside revisions may have limited market impact, given Powell is looking for “more” good data, not necessarily “better” data. But upward revisions would add to the pushback message and bring gains in the USD, while impacting JPY, EUR and gold negatively.

CADJPY. Source: Bloomberg, Saxo

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.