The Japanese yen is strengthening today, even against the US dollar which is mostly stronger. In recent times, the yen has strengthened despite rising interest rate differentials. We examined this issue in a broader commentary published yesterday, and explained that recent yen strength is the result of tighter monetary policy expectations. While the Bank of Japan is unlikely to end yield curve control entirely, markets are betting that the central bank will make future adjustments that will result in tighter monetary policies. Today's yen strength may be the result of lower equity markets across Asia. As the yen is a liability currency (meaning it is borrowed to acquire other assets), the yen tends to strengthen during downturns. AUD/JPY, for example, is down sharply today. The pair is a popular choice for carry traders looking to earn relatively higher rates of interest offered by the Australian dollar. Thanks to ongoing yen strength, our trending indicator now suggests that the yen is more likely to strengthen in both the short-term and the medium-term.
USD/JPY is currently trading above 108.70. EUR/JPY is currently down and trading above 134.20.
This is a fairly light week for economic data relating to the yen. The unemployment rate (2.8% vs. 2.7% expected) and household spending (-0.1%) were below expectations. Retail sales were ahead of expectations (3.6% vs. 1.8% expected). Tomorrow, we’ll see the BoJ’s projections for inflation and GDP growth. We’ll also see industrial production, construction orders and housing starts. On Thursday we’ll get cross-border stock and bond investments. Last week, the yen strengthened after Governor Kuroda signaled no change in the Bank of Japan’s monetary policies.
As the yen strengthens, we are upgrading the yen to neutral. Looking at the yen on a weekly chart, the currency is trading within normal conditions. This is based on various technical indicators when looking at a weekly chart.