During the Friday Asian trading session, the Japanese Yen (JPY) was the worst-performing currency. This drop was largely driven by positive sentiment regarding the prospect of a breakthrough in the ongoing US-China trade spat. This optimism has curtailed the demand for safe-haven assets, of which the JPY is commonly seen as one of the core players. Tokyo’s Consumer Price Index (CPI) provided a supportive reading of inflation that in ordinary times would have strongly supported the Yen. The market rewarded risk appetite, pushing traditional safe havens to the sidelines.
As optimism rises for a resolution of the US-China trade war, so has investor sentiment. There has been, as the article notes, a drastic rise in demand for the Yen. Traditionally, investors flock to it in the face of market turmoil. Agriculture traders were incredibly bullish on global trade relations. Encouraged by the favorable mood, they have sought after riskier assets, which has made the Yen less attractive.
Tokyo’s CPI figures released earlier this week easily surpassed these expectations, rising year-on-year 3.5% in April. That’s an increase from 2.9% in March. In addition, the core CPI, which excludes volatile fresh food prices, climbed to 3.4%, exceeding both forecasts and prior data. Better than expected inflation data has analysts buzzing. They are starting to bet that the BoJ will do more hikes by 2025. Normally, such developments would strongly support the Yen, but thanks to the current unprecedented market dynamics, all of these bullish signals have been drowned out.
The USD/JPY cross rate shows us what’s happening on the ground today. Despite the Yen’s present uncommon weakness, it’s sailing through choppy waters. If the USD/JPY pair breaks down below the 142.00 round number, it could see a swifter move down to the mid-141.00s area. From there, it would have a shot at that 141.10-141.00 zone. On the other hand, resistance is expected at the 143.55 level, which is currently considered a weekly high for the pair.
The initial inflation readings from Tokyo are quite positive and shouldn’t be downplayed. Still, dovish views of the Federal Reserve could limit how much strength the US dollar achieves, as well as how quickly and far the JPY can rebound. Oscillators on hourly charts indicate clear bullish momentum. This would increase upward pressure on the USD/JPY pair and complicate the outlook for the Yen further.
Japan transportation equipment’s 27%-increase in April made one of the largest contributions to the overall inflation increase, and overall inflation growth was the largest since 1981! These recent developments highlight the home-grown economic forces at work inside of Japan that will likely shape future policy moves from the BoJ.