Key Takeaways

  • The USD/JPY pair hit lows unseen since mid September. 
  • The Federal Reserve’s dovish stance dragged US bond yields, along with the dollar.

Hike Bites

The USD/JPY currency pair has dropped to its lowest level since September, currently trading at ¥147 against the US dollar. The yen’s recovery comes as market sentiment seems to shift away from the greenback, with bets on the Federal Reserve maintaining, or even cutting, its benchmark interest rate. 

The recently reported Consumer Price Index (CPI) results were better-than-expected, painting a picture of a slowing economy, inline with the Fed’s expectations due to recent interest rate hikes. The results point the market to the likelihood that the Fed is almost done with its higher-for-longer strategy aimed to curb inflation to its 2% goal, and may even cut rates in 2024, according to CME’s FedWatch tool.

That being said, Fed Chair Jay Powell isn’t quite so convinced. Powell has stated before that he’s wary of “head fakes” when it comes to inflation data, pointing out that any good results may be temporary before they reverse over time. Meeting minutes to be released today from the central bank’s Oct.31 – Nov.1 gathering will hopefully provide more insight on the Fed’s direction. 

With that, market sentiment towards the dollar is changing. The US dollar index (DXY) continues to slide lower, sitting at 103.3 Tuesday morning against a basket of other major currencies. Sinking treasury yields further dragged down the dollar, with the US 10-year Treasury Yield edging lower by about two basis points, with one basis point equalling 0.01%. Now pricing in at 4.41%, the yield is falling back after brushing off a peak of 5.021% in October. 

Although the Fed’s upcoming meeting minutes may have a direct effect on the Asian currency, the recovery can be attributed to a multitude of factors. Japan is holding its breath as they keep an eye out for Japanese inflation data, slated for release on Friday. The market is gearing up for hopefully positive results in the hopes that the Bank of Japan (BoJ) will abandon its negative interest rate policy. 

An anticipated round of salary increases in 2024 would raise these bets, as it would have the potential to stimulate consumer spending and fuel demand-driven inflation. This in turn would give the BoJ a good reason to reconsider its current rate stance, opening the door for a more stable position. 

In all, the yen’s takeover beside the dollar’s loss is a welcome treat for the Japanese government, which can now happily dodge any whispers of intervention to prop up its currency.

Stay Tuned

The dollar’s weakness doesn’t stop with the yen. While it may have started the conversation, the dollar is flaunting its weakness against other currencies. Propelled by the fragile dollar, the EUR/USD pair continues to gain momentum, boasting a three-month high at the $1.09 level. Further, the GBP/USD pair is enjoying a nice boost at the $1.2540 point, a level unseen since September. 

The yen’s upward climb, fueled by positive CPI results and a softer US dollar, sets the stage for a dynamic shift in currency markets. For Japan, the expected wage increases coupled with the anticipated interest rate hikes are adding some dimension to the scene. 

The dollar is clearly taking a breather while investors digest the CPI results, making room for other major currencies to capitalize. With the Fed’s meeting minutes looming, some crisp volatility may be introduced to the markets if the narrative isn’t as markets hope. Consider your positions, and take note of the available risk-management tools available, such as stop-loss. A trader who doesn’t allow emotions to take the lead is a smart trader indeed.