The USDJPY hangs in the balance at around 114.00
With both the US dollar and Japanese yen acting as safe-haven currencies even though their interest rate differentials are wide apart and probably growing, the moves in USDJPY are never that smooth. However, with all else being equal there should be an appreciation in the US dollar against the yen.
USDJPY Forex Analysis
In February 2016 the Bank of Japan reduced its bank rate to -0.100%. In March 2022 there is a real possibility that the US Federal Reserve could raise its interest rates up from 0.250% which they had set in 2020 to help with the Coronavirus pandemic. If this happens the interest rate differential would grow, and expectations would be for the dollar to appreciate against the yen. The major hurdles to the Fed following through with this rhetoric are a rising Omicron problem and potentially a worsening employment backdrop. The Fed is going to do whatever it takes to reduce the asset purchases through QE and then look to reduce their balance sheet.
During that month of February in 2016, the USDJPY dropped from 121.467 by over 8% down to 110.967 and then proceeded to make a low of 98.888 in May of 2016. The Bank of Japan has remained ultra-loose with its monetary policy since the US dollar has gone through a couple of policy cycles.
There has been an appreciation in the US dollar versus the yen since the bottom of the COVID-19 pandemic, first as a safe haven alongside the yen, then as a reflation trade as the USA pushed everything behind the development of vaccines and the subsequent rollout to economic reopening. This led to the states reopening faster than Japan and the economy recovering quicker. Japan's problems with vaccinations and lockdowns during the Olympics have been a huge drag on its economy and the yen has fallen.
The USD2trn Build Back Better bill proposed by Joe Biden has also contributed to the strength of the US dollar. This bill is now in trouble with Senator Joe Manchin withdrawing his support. On a promise from Biden that Manchin would support at least a $1.75trn Build Back Better bill, Progressives in the House voted for the $550bln infrastructure package earlier this year. According to the White House, Manchin's move is an "inexplicable reversal". The news of the failing Build Back Better bill has hurt US yields and the US dollar and has led to the greenback falling against the EUR, CHF, and JPY.
From August to late November this year the USDJPY was tracking the benchmark US 10-year yields higher, as inflation expectations were rising.
There was a second relationship with the price of oil as the Japanese manufacturer and exporter's costs were rising rapidly and putting pressure on the yen.
The US 10-year yields and oil correlations with the USDJPY have recently broken so I am deferring back to the expectations of the yen being viewed as more of a safe haven again over the US dollar.
On a daily chart of the USDJPY, the 20 and 50-period moving averages are converging on one another, but they are both reflecting the bullish overall momentum as they and price, are above the daily 200 EMA.
Should the fallout from the failed Build Back Better Act and a rising Omicron virus threaten the US economy, I will be preparing for an aggressive break out of the 113.10 lows to target the double bottom around 112.50, as declining US 10-year yields and falling oil prices could be very supportive to the yen.
On the Weekly chart the 110.00 balance area would appear to be the most logical area for some support to come back into the USDJPY should we get the dip. Otherwise, the grind could be higher and target 118.00 again.