Unpacking the Recent Economic Factors Shaping USD/JPY: What You Need to Know
The JPY has been at the center of the forex market recently as we concluded the “tremulous week.”
The USD/JPY dipped towards 130 after the banking sector collapsed and hit the lowest level in five weeks.
Here, we’ll look at why there has been a sudden flock toward JPY, how the recent economic factors affect the pair, and what to look for when the BOJ governor changes in April.
Various factors can influence the prices of stablecoins in the digital forex market, and one crucial consideration is the market trend of the underlying fiat currency. Our blog regularly updates major currency price movements and analyzes the policies and economic factors that drive them.
What’s going on with USD/JPY?
After reaching as high as 137.911 on March 8, USD/JPY has declined. The pair has lost significant ground as it is trading at 130.962. This is the biggest drop for the pair in five weeks as the concerns over the banking sector intensify.
What’s up with the global financial system?
The global financial sector has been jolted by a series of shocks in the last week, triggered by the failure of California’s Silicon Valley Bank. Signature Bank of New York followed this. In Europe, Credit Suisse asked for a lifeline too.
Amidst the crises, the Federal Reserve, European Central Bank, Bank of England, Swiss National Bank, Bank of Canada, and Bank of Japan announced a joint effort to improve market liquidity over the weekend.
What does this have to do with JPY rise?
The collapse of the SVB spooked markets, and they returned to safe-haven assets, JPY being one of them.
With the resurgence of financial crisis events, the Japanese yen has emerged as the obvious winner.
Because of Japan’s substantial current account and net foreign asset position, the yen has traditionally served as a safe haven currency in times like these.
While Japan’s current account surplus is lower than before the energy crisis, its strong foreign asset position triumphs.
Unchanged interest rates
At its March meeting, the Bank of Japan (BOJ) maintained ultra-low interest rates while postponing revisions to its contentious bond yield control policy, keeping options open ahead of a head shift in April.
As was widely expected, the Bank of Japan maintained its negative interest rate at -0.1% and underlined the central bank’s goal of keeping bond yield at 0%.
“Japan’s economy, despite being affected by factors such as high commodity prices, has picked up as the resumption of economic activity has progressed.’’ The bank said at its meeting.
The new governor in town
Kazuo Ueda, Kuroda’s replacement, took office as governor of the BOJ in April. Several observers anticipate the BOJ to adjust or eliminate YCC (yield curve control) during Ueda’s five-year tenure since the bank’s massive bond purchasing to preserve its yield cap has been criticized for distorting the yield curve’s form and depleting bond market liquidity.
Last month, Ueda supported Kuroda’s request to maintain the ultra-loose policy. Nonetheless, the new governor stated that he has ideas on how to leave low rates and is open to re-evaluating the present regulatory framework.
Most economists anticipate the BOJ to stop YCC this year, expecting to make changes within three months.
What’s up with USD?
On March 7, Fed Chair Jerome Powell hinted at a rate rise of 50 basis points, citing fears that excessively high inflation might persist for longer given the labor market’s strength. This caused a bullish rally in the market, with USD/JPY hitting 137.911.
Only two days later, problems at Silicon Valley Bank sparked worries of contagion and turbulence, causing rate hike expectations for both the March 22 FOMC meeting to plummet.
The Fed fighting
The inflation situation has worsened since the Fed’s last meeting, but financial worries may take precedence. Concerns remain that inflation is well over the Fed’s objective and not decreasing quickly enough.
The CPI report released on March 14 suggested that inflation is proving stickier than Fed hoped.
The consumer price index climbed 0.4% in February, bringing the 12-month total to 6%. This is a slight monthly decrease from 0.5% in January, but it is still higher than in five of the previous seven months.
The financial crisis, on the other hand, complicates the Fed’s view. It no longer allows the Fed to deal with inflation in isolation. This complicates the situation for the Feds.
Market sentiment in the banking sector stays low, and the Fed announced coordinated global liquidity on March 19, recognizing pressures in global funding markets. This is in addition to the domestic support for banks announced a week ago on March 12.
Investors anticipate it will be the last if a raise occurs in March since recession worries may push the Fed to decrease rates.
What to expect next?
The Fed’s next meeting will be held on March 22. Under Chairman Jerome Powell, the Fed has always emphasized the importance of data in policy choices.
This is likely truer than ever this week, as inflation remains high, but vulnerabilities to the banking sector provide apparent risks that might alter the broader economy’s direction.
It implies the coming Fed decision is more unclear than in previous meetings, and markets may react more strongly than usual to the Fed statement.
If the Fed raises rates by 25 basis points on March 22, we may see one more 25 basis point increase, leaving the Fed funds rate at 5–5.25%.
It also indicates the Fed’s confidence that the financial crisis will not deteriorate from here. A rate rise may be considered good news if the Fed is less concerned about the financial crisis.
What to look for around USD/JPY?
There won’t be much volatility in USD/JPY if the Feds keep interest rates at 25 bps.
Regardless of what the Fed does this week, it’s difficult to see risk markets fast moving away from banking sector concerns, putting the USD close to a safety bid.
Currently, investors are finding a safe haven in USD/JPY downside due to the recent chaos.
If the banking sector’s circumstances deteriorate, the USD/JPY could trade below 130. The Fed’s easing cycle will be accelerated as a result. The same is true for other major central banks, bringing global interest rates closer to Japan’s.
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