Article Summary
- Japanese yen strength pressures USD/JPY.
- US banking sector concerns drive safe-haven demand.
- Political volatility in Japan impacts monetary policy expectations.
- Potential for continued USD/JPY downward pressure.
USD/JPY Under Pressure
In Friday trading, the Japanese yen exhibited significant strength, causing the USD/JPY pair to break below the 150 level, a level that had previously acted as strong support. This decline follows the pair reaching its highest levels in eight months and is largely attributed to growing concerns regarding the health of some regional US banks.
Safe-Haven Flows
The emergence of stress signals in certain US banks has spurred global demand for safe-haven assets, with the Japanese yen being a primary beneficiary. The yen outperformed most of its G10 peers, with USD/JPY falling over 0.5% to around 149.63, its lowest level since October 6th. The Swiss franc also experienced a similar surge, while the US dollar and US Treasury yields both declined amid a sell-off in regional bank stocks.
Political Volatility
The Japanese yen experienced considerable volatility in the preceding week, falling to its lowest level since February following the selection of Sanae Takaichi as leader of the Liberal Democratic Party. This volatility was then compounded by an unexpected collapse of the ruling coalition in Japan. Christopher Wong, a foreign exchange strategist at OCBC Bank, noted that "USD/JPY extended losses tracking the fall in US Treasury yields amid risk aversion." He added that focus is also on the formation of the Japanese coalition government, particularly whether the LDP can reach an agreement with Nippon Ishin no Kai.
Monetary Policy Outlook
The political uncertainty has weakened market expectations for a potential interest rate hike by the Bank of Japan this month. However, Bank of Japan Governor Kazuo Ueda told reporters in Washington on Thursday that if confidence in achieving its economic outlook increases, the Bank of Japan will continue to tighten its monetary policy, opening the door for a rate hike in the near future.
Historical Warning
Strategist Mark Cranfield points out that FX traders may recall that during the regional banking crisis in 2023, USD/JPY fell by around 800 points from its high to its low. If a similar scenario unfolds, the pair could fall to the low 146s this month. He noted that the key driver is once again the steep decline in US Treasury yields, with 2-year Treasury yields already falling to three-year lows. With traders pricing in a Fed Funds target rate in the 3% area, there is still plenty of room for downside overshoot.
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