Title: USD/JPY Declines Amid Weak US Manufacturing Figures and Rising Japanese Bond Yields
Original article by Akshit Pannu, FXStreet
The USD/JPY currency pair posted a noticeable decline on Friday, driven by a combination of disappointing US macroeconomic data and rising Japanese government bond yields. This shift in market sentiment pressured the US Dollar and benefited the Japanese Yen as investors reassessed their expectations around economic strength and monetary policy from both economies.
This in-depth analysis explores the major factors behind the USD/JPY movement, including economic data, monetary policy developments, and market sentiment that contributed to the bearish trend.
Overview of Price Movement
– USD/JPY slumped by nearly 0.5% in Friday’s trading, retreating from recent highs as trading wrapped up for the day.
– As of late Friday, the pair was trading near 144.30, sliding from prior levels around 145.00.
– The decline signaled a temporary reversal in the USD’s upward momentum, which had been supported by expectations of resilient US economic performance and higher-for-longer interest rates.
Key Drivers Behind the USD/JPY Decline
1. Weak US Manufacturing Data
The most influential development pushing USD/JPY lower was the release of weaker-than-expected data from the US manufacturing sector. The Institute for Supply Management (ISM) published its December 2023 Manufacturing PMI report, which disappointed markets:
– The ISM Manufacturing PMI came in at 47.4, below the 47.5 forecast and marginally higher than the previous reading of 46.7.
– This marked the 14th consecutive month that the index remained below 50, the threshold that separates expansion from contraction.
– Despite the slight rise compared to the previous month, the data still pointed to general weakness in US industrial output, especially in durable goods sectors.
The weak ISM report contributed to a drop in demand for the US Dollar as investors grew concerned over the likelihood of a broader economic slowdown, which could prompt the Federal Reserve to ease interest rates sooner than previously thought.
2. Rising Japanese Yields
At the same time, rising Japanese government bond (JGB) yields offered support to the Japanese Yen. Investors interpreted the recent developments in the Japanese bond market as a potential prelude to a shift in monetary policy by the Bank of Japan (BoJ). Key updates included:
– The yield on the Japanese 10-year government bond rose to 0.66%, marking a two-week high.
– Expectations have grown that the BoJ may begin to unwind its ultra-loose monetary policy stance as inflation continues to stay above its target.
– Though no immediate change is expected, the market is preparing for a potential change in the BoJ’s yield curve control policy over the coming months.
Higher yields in Japan make the Japanese Yen more attractive to investors, reducing the appeal of carry trades that bet against the Yen in favor of higher-yielding currencies like the US Dollar.
3. Federal Reserve Policy Outlook
The broader context of changing expectations for US monetary policy also weighed on USD/JPY. Traders have increasingly believed that the Federal Reserve may pivot toward rate cuts in 2024, which would narrow the yield differential that has kept the US Dollar supported versus the Yen.
– Fed fund futures markets are now pricing in approximately 125 basis points of rate cuts by the end of 2024.
– Many analysts expect the first rate cut potentially in May or June if inflation continues to fall and economic growth slows.
– Statements from Fed officials recently have reinforced the idea that the Fed is nearing the end of its tightening cycle.
These shifts in expectations affect the relative attractiveness of the Dollar, and as a result, may be driving investors to reduce long positions on USD/JPY.
4. Mixed Sentiment in Equity Markets
While equity markets were mixed, broader risk sentiment was cautious. US stocks closed largely flat, with some signs of rotation from tech and growth stocks to defensive positions. A lack of momentum in
Explore this further here: USD/JPY trading.