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The Japanese yen continues to lose ground. Last week, USD/JPY rose 1.41% and has added another 0.97% on Monday. Earlier in the day, USD/JPY touched 125.55, its highest level since June 2015.
Yen slides, BoJ downgrades economy
It has been a bleak start to the week for the Bank of Japan. The central bank has tried to curb the yen’s slide against the dollar, albeit with limited success. USD/JPY jumped 5.85% in March and the upswing hasn’t let up, with a gain of 3.15% so far in April, with no end in sight for the yen’s slump. With USD/JPY punching above 125 on Monday, it came as no surprise that a senior BoJ official responded with a warning that excessive volatility in the exchange rate was hurting businesses. The BoJ also expressed its concern last week when USD/JPY rose above the 125 line, but clearly, this hasn’t done much to stem the yen’s nasty slide.
US Treasury yields continue to surge, with the 10-year bond rising to 2.78%, its highest level since 2019. The US/Japan rate differential continues to widen, which is bearish for the yen, as the currency is very sensitive to the rate differential.
The BoJ on Monday downgraded its outlook for 8 of 9 regional economies, with Governor Kuroda warning that the war in Ukraine had led to “very high uncertainty” as to the impact on Japan’s economy and inflation. This has raised concerns that the BoJ may lower its growth forecasts later in April, which could put further pressure on the wobbly yen.
The Fed is under pressure to move quickly and quench spiralling inflation. Policy makers have been busy telegraphing the possibility of 0.50% hikes, and there are growing expectations of back-to-back 0.50% hikes in May and June. The Fed prefers increments of 0.25%, but is scrambling after falling behind the curve on inflation. The danger with super-size rate hikes is that it could send the economy into a recession, making the increase in rate hikes a tricky task for the Fed.
USD/JPY Technical
USD/JPY has broken above resistance at 125.22. Above, there is resistance at 1.2615, which has held since May 2002
There is support at 123.71 and 122.81
The run-off between the two candidates is looking to be far closer than five years ago when Macron scooped two-thirds of the vote. While there is still plenty that could not bring themselves to vote for Le Pen as we saw in 2017, her softened image appears to have swayed others and while pols still favour Macron, some fall within the margin of error that makes Le Pen a realistic victor this time around.
While that would no doubt be bad news for Europe, it seems markets aren’t particularly concerned if today’s trading is anything to go by. Some have chosen to compare a Le Pen victory to Brexit and Trump, two events that were deemed to be a negative for stock markets before the vote but did not turn out to be so over time. Perhaps lessons have been learned.
Oil slides amid Chinese restrictions
Oil is off around 3% on the day, with Brent back below $100 and hitting its lowest level in almost four weeks. There has been a big effort to alleviate the pressures in the oil market in recent weeks which has no doubt helped but it’s the lockdowns in China that are driving the latest declines.
The country’s zero-Covid policy is naturally having a dampening effect on demand which is aiding the rebalancing efforts. Of course, this is just a temporary demand hit so the upside risks to the price remain but it is offering some reprieve for now. How widespread the restrictions become and for how long will determine the sustainability and severity of the declines.
Gold pares gains after facing resistance once more
Gold is up a little on the day but has given back the bulk of its gains from earlier in the session. Once again the yellow metal has run into resistance around the same region it did a few weeks ago and a recovering dollar has also weighed on it around those levels.
If it can break beyond here – an impressive feat considering we’re still seeing yields rising – then $2,000 becomes the next big test. Whether it’s inflation fears or risk aversion driving the move, we’re certainly seeing gold coming back into favour. Not that it ever really fell out of favour, even as risk appetite returned and interest rate expectations were ramped up considerably.
Further pain ahead for bitcoin?
Bitcoin is getting hit hard again on Monday, losing more than 4% and coming close to $40,000 where it could see some support. A break of this level could be a psychological blow. From a technical perspective, it would also mean a break of the 50 fib level – 2022 lows to highs – which could also be a negative signal. It will be interesting to see if these levels attract dip buyers as the breakout two weeks ago looked to be a very bullish move. But it’s all been downhill since then.