March has been a sea of red for the Japanese yen, as USD/JPY has soared 5.04% this month. The currency is steady on Wednesday, after breaking above the 121 line earlier in the day.
Rate differential weighing on yen
The yen took a double-punch in the ribs on Tuesday, as USD/JPY jumped 1.14%. Central bankers drove the gains, as Fed Chair Powell sounded hawkish while BOJ Governor Kuroda was dovish. Powell said that inflation was putting the recovery at risk and the Fed was prepared to do whatever was needed, including implementing 1/2 point rate hikes at policy meetings. The Fed has been widely criticized for being too slow in its response to rising inflation, as Powell was preaching that inflation was transitory even as CPI rose month after month. The Fed seems determined to make amends, and Powell’s strident comments were meant to convey a message to the markets that the Fed means business in its determination to contain inflation.
Meanwhile, BoJ Governor Kuroda was preaching the exact opposite message to parliament. Kuroda stated that it was premature for the Bank to debate exiting its loose policy and that it would continue to purchase ETFs as needed. Kuroda said that the Bank needed to “patiently maintain our powerful monetary easing” in the face of rising inflation.
The comments from Powell and Kuroda widened the US/Japan rate differential and sent the yen tumbling lower. US Treasury yields have been rising and the 10-year yield is currently at 2.36%.
With the yen being extremely sensitive to the rate differential, a further upswing in US yields will spell more trouble for the yen, which could climb to 123.00 or even 125.00.
Earlier in the day, Japan released BoJ Core CPI, the central bank’s preferred inflation gauge. The January reading of 1.0% YoY was the highest gain since March 2016. Inflationary pressures are nowhere near as strong as we’re seeing in the UK or the US, but after decades of deflation, the BoJ may have to adjust its monetary policy to a new era of inflation moving upwards.
- USD/JPY has broken through resistance at 120.72. Above, there is resistance at 122.04
- There is support at 118.62 and 117.84