Why is the Japanese Yen Weak?

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Why is JPY so weak?

The Japanese yen (JPY) posted significant weakness against a basket of currencies. Gaining over +300 pips since the beginning of October 2022, USDJPY may appear to be unstoppable.

The main trigger is the Fed, the US central bank. The Fed announced it may begin tapering in November, 2021. Since the pandemic had worsened global economies, the central bank initiated its financial program. The aim of the program is to prevent large firms from collapsing (as seen in the 2008 financial crisis).

As the US economy recovered along with high inflationary figures, the Fed may begin its tapering, reduce its purchasing program. Fed officials also hinted a possible rate hike in 2022, a year ahead of prior expectations.

Crude oil has also enjoyed moderate gains with the leading indices. During risk appetite the Japanese yen (JPY) tends to weaken against a basket of currencies. We have seen this correlation for many years. Japan’s central bank (BOJ) is closely monitoring JPY weakness in the Forex market.

Please click on the chart to enlarge:

USDJPY Daily Chart 18 October 2021

USDJPY Daily Chart 18/10/21

USDJPY Daily Chart 18 October 2021

The BOJ has a history of intervening in the Forex market. The prior interventions were to weaken the yen. The currency tends to strengthen during risk aversion. Following the devastating tsunami that struck Japan there was coordinated action from central bank to weaken JPY.

A weak JPY plays in favor of Japan’s exports. We are uncertain whether the BOJ will indeed intervene to strengthen JPY at current currency levels. Prior interventions were done in USDJPY and GBPJPY.

Fed Tapering Effect on JPY

The Fed is planning to cut the US treasuries purchases by $10 billion a month and mortgage backed securities by $5 billion a month. Some Fed members wish to see a larger reduction. The Fed is expected to meet at the beginning of November 2021 to determine how to proceed.

The current expectations are for the Fed to begin the tapering in November or December. The upcoming monetary policies may have a significant impact on the market. The outcome of the tapering may last for several weeks rather than several days or hours.

Other central banks such as the European Central Bank (ECB) may also update their monetary policies. As the global economies begin to recover rate hikes will be on the table.

Even when technical analysis is used, it is important to monitor such events.

USDJPY Forex Forecast

USDJPY trend may only be determined as we near the Fed monetary policy. The Fed may then reveal its tapering plans and possibly hint on its future monetary policy. Despite technical analysis there are occasions where fundamentals triumph.

Dollar yen did reach some resistance at 114.50. however, at the time of this writing there are little indications whether it will indeed hold. These types of resistance levels often act a warning signal for traders that are holding long positions in USDJPY.

US economic figures such as the upcoming GDP will be closely monitored. At ddmarkets we will be monitoring all of JPY pairs and crosses. When an entry is discovered we will update our members.

Last Updated on October 18, 2021