The yen fell below 150 per dollar for the first time since November as higher-than-expected U.S. inflation significantly dampened bets on an early U.S. interest rate cut.
Interest rate swap contracts for the U.S. central bank, which as recently as mid-January fully priced a rate cut in May and 175 basis point easing of policy by the end of the year, have been dramatically revised.
The odds of a May cut dropped from 64% to 32% following the release of inflation data. The US dollar's rise against the Japanese currency prompted sharp statements from Japanese officials. Masato Kanda, deputy finance minister, said early Wednesday morning that currency intervention was possible after such a sharp strengthening of USDJPY.
Most Bank of Japan watchers expect Governor Kazuo Ueda to raise the interest rate either in March or April. An earlier rate hike could provide quicker support for the yen, but economists note that the central bank will be reluctant to give the impression that it is simply reacting to market movements.
Japan directly intervened in currency markets three times in 2022, when the yen hit its lowest level in decades.
The yen has fallen about 6.4% this year against the dollar, the most among major currencies. Takeshi Minami, chief economist at the Norinchukin Research Institute, expects the currency trend to shift direction this year as the Fed moves to cut rates and the Bank of Japan hikes rates in contrast.
Thus, both in the short and long term, there are conditions for weakening of USDJPY. The factor of short-term decline is the probable currency intervention by the Bank of Japan, and the condition of long-term weakening is the reduction of the Fed interest rate, which will take place sooner or later anyway, and the interest rate hike by the Bank of Japan.
The final recommendation is to sell USDJPY.
Profit should be taken at the level of 149.50. A stop-loss should be set at the level of 151.70.
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