“USD/JPY has been unable to sustain a move beyond 135.75 and the rapidly deteriorating momentum suggests that further attempts are unlikely.”
– Lee Sue Ann, Economist, UOB Group
“USD/JPY’s advance appears to be stalling and while the rapid loss of upward momentum does not necessarily imply a more significant top is in place, it does warn that a period of consolidation/correction is likely.”
– Quek Ser Leang, Markets Strategist, UOB Group
The USD/JPY currency pair, which reflects the exchange rate between the US Dollar and the Japanese Yen, has been struggling to sustain a move beyond the 135.75 level. As of late, it appears that the momentum is losing steam, according to UOB Group Economist Lee Sue Ann and Markets Strategist Quek Ser Leang.
The USD/JPY experienced a rapid surge earlier this year, reaching its highest level since 2015. The rally in the currency pair was driven primarily by the strong performance of the US economy and rising interest rates, which attracted more investments into the US Dollar. In contrast, the Japanese Yen had been weighed down by Japan’s weak economic fundamentals and persistent deflationary pressures, which have hindered the Bank of Japan’s efforts to normalize monetary policy.
However, recent trading sessions have seen the USD/JPY failing to break above the aforementioned 135.75 threshold. Although there has been repeated efforts to push the currency pair higher, they have all been met with strong selling pressure, resulting in a rapid decline in momentum.
Lee Sue Ann and Quek Ser Leang argue that the deteriorating momentum indicates that further attempts to sustain a move beyond 135.75 in USD/JPY are unlikely. The rapid loss of upward momentum does not necessarily mean that a more significant top is in place, but it does serve as a warning that a period of consolidation or correction is on the horizon.
There are a few possible reasons for this deceleration in momentum:
1. Profit-taking: Some market participants who have accumulated positions in USD/JPY at lower levels may be looking to take some profits off the table. This could be due to concerns about the potential for a deeper correction or a change in the underlying fundamentals.
2. Overbought conditions: Technical indicators may suggest that USD/JPY is now in overbought territory, providing a signal to traders that a pullback is warranted. This can cause market participants to unwind their long positions, thereby contributing to the currency pair’s inability to sustain a move beyond 135.75.
3. Shift in market sentiment: The recent surge in global bond yields has led to a reassessment of the outlook for monetary policy normalization across various economies, including Japan. This could be causing a shift in market sentiment, with investors reassessing their bearish view on JPY and considering the potential for a more hawkish policy stance from the Bank of Japan.
4. Geopolitical risks: The ongoing geopolitical tensions, particularly between Russia and Ukraine and the recent missile tests by North Korea, have likely contributed to a rise in risk aversion among market participants. This typically benefits the safe-haven Japanese Yen to some extent, thereby putting pressure on USD/JPY.
Taking these reasons into account, it seems that the view of the UOB analysts is supported by several factors suggesting that the advance in the USD/JPY currency pair may have reached its peak, at least for the time being. Therefore, investors should not be surprised to see a period of consolidation or correction despite the overall underlying strength of the US economy and the relatively weak position of the Japanese economy.
In the short term, market participants should closely monitor economic data releases, central bank policies, and geopolitical developments, which have the potential to drive significant fluctuations in the USD/JPY exchange rate. In particular, the upcoming release of the US nonfarm payrolls report and the Bank of Japan’s monetary policy meeting minutes will provide essential insights into the economic health of both countries and potentially offer guidance on the future direction of the currency pair.
To summarize, the recent inability of the USD/JPY currency pair to sustain a move beyond the 135.75 level suggests that the momentum is waning. Although this does not guarantee a more significant trend reversal, it does raise the likelihood of a period of consolidation or even correction, as the market digests recent developments and reassesses potential risks. Investors should keep a close eye on the evolution of macroeconomic and geopolitical factors to inform their trading decisions in the coming weeks.