Why has the Japanese Yen depreciated again?
The Japanese yen has depreciated to above 150 again, mainly affected by the warming of trade under Trump and the soaring US bond yields. The support rate for the Liberal Democratic Party in the Japanese election has declined, which may delay interest rate hikes, but the depreciation of the yen has also increased the probability of rate hikes. In the medium term, the yen still has room for appreciation, especially when Japanese domestic investors tend to buy yen
After three months, USD/JPY has once again risen above 150.
Why has the Japanese Yen depreciated again?
1. Trump's trade tensions continue to escalate, leading to a surge in US bond yields and the US dollar.
Yesterday, in the absence of any data, the 10-year US bond yield surged to 4.2%, rising by 12 basis points intraday. The main reason is the expectation that the US fiscal deficit may worsen further after Trump's victory.
In a report over the weekend, JPM outlined the potential changes in 2-year and 10-year US bond yields under four scenarios. In the scenario with the highest probability currently, a "Republican sweep," the 10-year US bond yield could rise by up to 40 basis points.
Chart 1: JPM's analysis of the impact of the four election scenarios on US bond yields
Chart 2: Probability of victory (Trump minus Harris) and the trend of the US dollar index
2. Weakness in the ruling party's polling in Japan may delay the Bank of Japan's interest rate hike.
In addition to the US elections, Japan will also hold a general election for the House of Representatives at the end of the month (October 27). The latest polls show that the ruling Liberal Democratic Party led by Prime Minister Shizo Abe has seen a decline in support and may not be able to secure a majority of seats. Abe advocates for the normalization of the Bank of Japan's monetary policy, but if the ruling party fails to secure a majority, it will be more challenging for Japan to raise interest rates.
Still optimistic about the Yen's appreciation in the medium term
1. The depreciation of the Yen above 150 will increase the probability of a Japanese interest rate hike, and there may be verbal intervention in the exchange rate by Japanese officials in the coming days.
Furthermore, last week, Japan's largest trade union federation (Rengo) announced plans to demand a wage increase of over 5% in next year's spring wage negotiations, indicating significant wage inflation pressure in Japan.
2. The current supply and demand of the Yen is more balanced.
Looking at intraday statistics, the time periods when USD/JPY has risen in October are mainly during the European and New York sessions, while during the morning Japanese session, USD/JPY tends to decline, indicating that domestic Japanese investors are more inclined to buy the Yen.
Stay Cautious Before the Election
The US Dollar Index has broken through the 200-day moving average of 103.8, with upward momentum in technical terms. With 2 weeks left until the election, the market may still follow the polls and trade in the direction of the "Trump trade" (USD appreciation).
Although we still favor the appreciation of the Japanese Yen in the medium term, caution is needed in positions before the election. Overnight positions should not be too large, and the hourly trend patterns we have summarized in the previous text may be helpful for intraday trading. Keep an eye on the resistance near the 200-day moving average of 151.31 for USDJPY.
Author: Fang Yuqi, Source: Good Morning Forex Market, Original Title: "US Dollar vs Japanese Yen at 150"