Despite Japan's attempts to protect the national currency from overpowering US dollar, JPY continues to trade at a 32 year low. Furthermore, yen is facing increasing pressure, clouding its prospects.
Hidden war against USD
The Japanese government has remained silent on the recent sharp spikes of the Japanese yen.
At the end of last week, JPY nearly plunged to 152 against USD amid growing monetary policy divergence between the US and Japan.
However, the Japanese yen unexpectedly reversed upwards on Monday, jumping by 4% to 144.55 against the US dollar.
Obviously, the yen's recovery could not have been just a miracle. There are no fundamental factors that would trigger such an upsurge, suggesting to many that it occurred thanks to actions by the Japanese government.
Last week, the Japanese Ministry of Finance spend more than $30 billion to support the national currency, up by $10 billion from the previous intervention in September.
However, it did not provide significant support for JPY. The US dollar quickly recovered and approached the key level of 150 on Monday.
Afterwards, USD suddenly dived to 145.28. Most analysts believe that this drop was also caused by a currency intervention by Japanese authorities.
Unsinkable dollar
Japan has performed at least three currency interventions over the past month to prop up its national currency, but it has failed to produce any long-term effect.
The US dollar currently has strong support from fundamental factors. It can withstand even bigger moves by the Japanese government.
Yesterday, USD/JPY quickly returned into the 149 area. It hovered near it early on Tuesday. The pair is holding steady, despite the latest USD retreat.
Early on Tuesday, DXY fell to 111.78 amid weak US business activity data for October.
According to preliminary manufacturing PMI data, the index fell to 49.9, below the forecasted 51.2. Services PMI decreased to 46.6 – economists expected the index to reach 49.2.
Business activity in the US has declined for a fourth consecutive month, indicating that the US economy is slowing down amid rising interest rates. This would make further aggressive tightening by the Fed less likely.
Many analysts now predict that the Federal Reserve could slow down the pace of its interest rate hikes and move the rate up by only 50 basis points in December.
Such a scenario is weighing down on the US dollar. However, USD's short-term trajectory would largely depend on the upcoming Fed policy meeting in November.
Most market players expect the US central bank not to slow down its pace and to increase interest rates by 75 bps in November.
This possible hike is the main factor affecting USD's price action at this point. As the Fed meeting approaches, the US dollar would get stronger, particularly against the Japanese yen.
Yen under pressure
The yen is also under strong pressure from the Bank of Japan's dovish policy, besides the market's expectations of a hawkish Fed course.
The Japanese regulator has kept very low interest rates in place. As a result, the yen went down by 20% against the US dollar. The yen's already poor situation could be exacerbated even further this week.
USD/JPY traders will be focused on the BOJ policy meeting, which will be held on Thursday and Friday.
Analysts expect the Japanese central bank to increase its outlook on inflation but maintain the ultra-dovish policy to support the fragile Japanese economy.
Unlike the US and the EU, Japan has not yet fully recovered from the impact of the COVID-19 pandemic. The trade deficit is also weighing down significantly on the Japanese economy.
In September, Japan's trade deficit hit another yearly high, rising to 14 trillion yen y/y.
Declining consumer sentiment is also negatively affecting the Japanese economy. Rising inflation has pushed down purchasing power in the country.
The government of Japan is set to approve another economic stimulus package on Friday, spending more than 20 trillion yen to support households and stimulate GDP growth amid rising inflation.
This decision will be another blow for JPY. All negative factors combined could in fact knock out the yen at the end of the week.
However, the Japanese government will likely intervene to support the currency once again. USD/JPY could be highly volatile in the next couple of days.
