The USD/JPY is an abbreviation for the currency exchange rate for the U.S. dollar and the Japanese Yen. In layman’s terms, the combination describes the number of Yen required to buy one U.S. dollar. USD/JPY is one of the most popular forex trading combinations in the world because the Yen, like the U.S. dollar, is used as a reserve currency. In forex trading parlance, reserve currency refers to an amount of currency held by central banks and major financial institutions to use for international transactions. Reserve currency reduces exchange rate risk and helps facilitate global transactions, including investments, forex trading and international debt obligations.
Let’s now look at some other aspects of the relationship and the recent high of the U.S. dollar against the Japanese yen.
USD/JPY Relationship With Treasuries
The USD/JPY has a correlation with U.S. Treasuries, which basically means that when treasury bonds, notes, and bills rise, USD/JPY prices weaken. People who invest in this forex trading pair have the security that the U.S. never defaults on bond obligations which then provides a secure, safe-haven status.
The USD/JPY movements are primarily affected by U.S. developments and provide the best reactions to yields and U.S. data. When interest rates are on a high during a trading day or predicted to rise in the future, the price of treasury bonds goes down. This, in turn, brings up the U.S. dollar, which then leads to the strengthening of USD/JPY prices.
Safe Haven Currency
The Yen has historically remained a safe haven currency which means that in times of market turbulence, investors can depend on the Japanese Yen for relative stability. This consequently leads the Japanese Yen to appreciate.
Reason for USD/JPY High
The USD/JPY currency pair is currently moving fast and reached a five year high. But what exactly is the reason behind this high and what is the future outlook? Read ahead.
Dollar/yen hit 115.88, the highest since 2017, and the reason is that it owes its strength to U.S. yields. As returns on U.S. treasuries increased to 1.63% on Monday, investors expected a consequential rate hike from the Federal Reserve. The resultant sell-off in bonds and increase in yields led to an even higher increase in the pair. USD/JPY has had the best reaction to yields, unlike other currencies, which are impacted by risk-on, risk-off moves. The Yen, like the dollar, is a safe haven currency and does not fall when U.S. data is weak. It instead reacts to geopolitical tensions like conflicts in North Korea or between Russia and Ukraine, in which case it decouples from yields.
Currently, the USD/JPY is moving along with yields in conjunction with consequential events in Japan. If the Bank of Japan wants to move the Yen upwards, there needs to be a substantial change in monetary policy. The reason behind this is that Economic indicators like GDP inflation and unemployment barely have any effect.
Unlike the Federal Reserve, which is on the path to raising rates in 2022, the BOJ is going to remain the way it is. The uncertainty of the timing of raising rates, either in March or May, can affect the dollar while the Yen remains stagnant.
On the second trading day of 2022, the dollar was boosted by a rise in U.S. treasury yields. The dollar was up 0.4% at 115.835 against the Yen, affecting its overnight gains to reach its highest since January 2017—the highest in five years. In contrast, the euro has only minorly changed versus the dollar, at $1.1296 EUR=EBS.
To Wrap Up
Investors see Omicron as likely to be less disruptive and risky to the global economy compared to previous variants of Covid-19. That’s the reason markets are focusing on supply chain impact and inflation narrative. This sentiment is boosted by studies showing that the risk of hospitalization is lower for Omicron, and chances of severe infection and casualities are lower.
As investors remained confident that the U.S. Federal Reserve would announce a tapering of its bond-buying, traders were able to ignore the lackluster job report. Consequently, the U.S. bonds yields were higher and the Yen, which is particularly affected by interest rate differentials, hit 113 yen per dollar in the morning London trade.
The Japanese currency was also affected by a slight bend towards riskier currencies such as the Australian dollar, which gained. The gain in the Australian dollar was also affected by a rise in oil prices and a pick-up in economic activity.
Since Japanese government bond rates are well anchored and the Japan Central bank has kept a hold on policy, the Fed tapering announcement will raise U.S. Treasury yields further. The higher dollar-yen pairing will be favored, and in the next week, consumer price index and retail sales could prove to be the biggest risk for dollar-yen pairing.