Bloomberg: yen weakness may fade into the past

Source: Bloomberg

Author: Chikako Mogi

Article: Original article

Publication date: Friday, November 11, 2022

The U.S. inflation report pushed the yen to the brink of reversing its trend of weakening against the U.S. dollar.

The USDJPY fell more than 4% to a group of key support levels just above 140, including the 2022 uptrend. A breakout would open the door for further gains for the Japanese currency, which still has the worst year-to-date performance of its peers, and would ease the pressure on the government.

A slowdown in U.S. consumer price growth has triggered speculation that the Fed will cut the pace of rate hikes, weakening the dollar and lowering Treasury yields, which have put pressure on the yen this year. 

On Thursday, the yen had its biggest one-day gain against the dollar since 1998.

“Signs have emerged for a change in the yen weakness trend,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities. “In terms of direction, it’s too early to decisively say yen’s weakness has ended, but charts say it’s over.”  

A widening trade deficit and aggressive US rate hikes driving Treasury yields higher have combined to push the Japanese currency to a 32-year low this year. Japan has spent about 9 trillion yen ($63.5 billion) on interventions in September and October in an attempt to slow the pace of losses.

In anticipation of the Fed's next rate decision on Dec. 14, labor market data and another consumer price index report for November are expected, which could still revive the hawkish stance. But comments from Fed officials after Thursday's inflation data reinforced hope that the pace of rate hikes in December will slow to 50 basis points.

“Key is whether dollar-yen at 140 will be supported,” Ishizuki said. “Momentum appears to be building for the pair’s downside.”

Forecast:

The strongest one-day drop in USDJPY since 1998 is a serious hit to the whole uptrend. Nevertheless, it is too early to talk about a complete reversal of the trend before this month's US labor market and inflation data are released. A flat is more likely in the coming weeks around the level of 140-147.