USDJPY soars to 20-year high as monetary policies diverges further

10 May 2022

The Japanese yen has suffered greatly against the US dollar as a confluence of various macroeconomic events strengthened the greenback while weakening the Japanese currency. The USDJPY pair staged a vertical climb with nine consecutive weeks of gains since the 2^nd week of March. The US Dollar Index (DXY), which gauges the US Dollar’s strength against a basket of rival currencies, soared above 104, which is the highest level since 2002, before retracing to hover around 103.6. In this article, we will elaborate on a few key drivers responsible for the currency pair’s price movement.

Safe haven status propels US dollar

Amid a series of geopolitical uncertainties around the world, like the Russian’s invasion of Ukraine, the increasing list of countries who sanctioned Russia and the persistent lockdown in China, which had caused serious concerns of global supply chain disruptions, have spurred demand for the US dollar, which is seen as a relatively safer asset to hold at times of uncertainties.

Strong jobs market and high inflation prompts Fed’s hawkish actions

As the US economy has recovered well from the pandemic led recession and inflation reaching a decades high, the US Federal Reserve has stepped in to fight the rising cost of living by implementing monetary policy tightening with interest rate hikes and measures to reduce the balance sheet.

Aside from price stability, the Fed has been mandated to achieve the goal of maximum employment. The US Non-farm Payrolls (NFP) released by the US Bureau of Labour Statistics last Friday, revealed that the US economy added 428,000 jobs in April. The data is higher than the forecasted figure of 391,000.

The high inflation as well as the robust jobs market has already spurred the Fed to raise interest rates twice in 2022, with a 50 basis points increase in its latest policy meeting. Higher yields on US dollars denominated assets, and the expectation of another interest rate hike in June, has provided tailwinds for the US dollar.

Diverging Monetary Policies

Amid the global inflation that has led to major central banks rushing to fight the inflation, the Bank of Japan (BOJ) remains one of the very few maintaining a dovish stance. The BOJ will continue to set short-term interest rates at -0.1%, while guiding the 10-year Japanese government bond yields to around 0% to support the economy.

The persistent ultra-loose monetary policy by BOJ further widens the yield spread between Japanese yen and US dollar, favouring funds flows into the greenback and boosting its value as demand rises.

Technical Analysis

On the monthly chart, the USDJPY continues its ascent after soaring past the breakout target from a falling wedge formation around 123. The occurrence of a Golden Cross, whereby the 50 exponential moving average (EMA) crosses above the longer term 200 EMA, is a firm validation of the pair’s strong uptrend. The Moving Average Convergence Divergence (MACD) indicator displays a bullish momentum with the histogram in positive region and above the signal line. Relative Strength Index (RSI) is currently in overbought region above 70, indicating a possible retracement to retest support.

Looking ahead, the strong bullish momentum is likely to propel USDJPY to test the 2002 high at 135.19. If this level is breached, the next resistance lies at 147.71, which was last seen in 1998. In the event of a pullback, the 2015 resistance-turned-support at 125.853 would likely provide support to the pair.

Tuesday, May 10

USD – Fed’s Williams speech

Wednesday, May 11

USD – Fed’s Waller speech, Fed’s Mester speech, Consumer Price Index (MoM)(YoY)(Apr), Consumer Price Index ex Food & Energy (MoM)(YoY)(Apr)

Thursday, May 12

USD – Monthly Budget Statement (Apr), Initial Jobless Claims(May 6), Initial Jobless Claims 4-week average (May 6), Producer Price Index ex Food & Energy (YoY)(Apr)

JPY – BoJ Summary of Opinions, Current Account n.s.a.(Mar)

Friday, May 13

USD – Michigan Consumer Sentiment Index (May)

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