The Japanese yen rallied to five-month highs while Treasury note yields approached the lowest levels of the year as investors are looking for traditional havens from geopolitical risks in Asia and the Middle east. The yen continued to strengthen massively yesterday on Tuesday by more than 0.9 percent, breaking below 110 per U.S. dollar for the first time since November, and its significant move brings it closer to its 200-day moving average of about 108.649.
The yen performs well versus all of its G-10 peers as tensions in Asia ratcheted higher, with a nuclear strike warning from North Korea and President Donald Trump saying that the U.S. would not abandon considering to react with military action and would “solve the problem” with or without China. Secretary of State Rex Tillerson said that Russia must abandon its support of Syrian President Bashar al-Assad’s regime during a Group of Seven meeting.
The value of yen against the dollar was experiencing a dramatic rise since the announcement of Fed’s rate hike while normally the dollar would appreciate with raised interest rate. The reason of dollar’s depreciation might be that the market had anticipated Fed’s rate hike action and absorbed it in advance with a reaction of one month’s rise before the announcement. At the time when the Federal Reserve declared its rate decision, the dollar was considered to be overvalued and the action then triggered its sharp drop.
The U.S. dollar index is technically in the downward trend since the beginning of this year, and it decreased recently, erasing its gains over the past two weeks partially. It’s now approaching the 60-day moving average and waiting to breakout. Over the near term period, the U.S. dollar index tends to decline further to get closer to the MA200 while the narrow gap between the trendlines in blue may trigger a new big move.
Chart 1: USD Index Daily
Bank of Japan’s governor on Tuesday said some of the options the central bank has when it decides to unwind its quantitative easing programme include raising interest rates on the excess reserves lenders hold with the bank. Haruhiko Kuroda, speaking in the upper house of parliament, said it was too early to say specifically what the BOJ would do with the government debt on its balance sheet when it has to exit its ultra-easy policy.
He also mentioned that the BOJ would be able to manage its exit smoothly, including reducing the size of its holdings of bonds purchased in recent years to stimulate economic growth. The BOJ currently applied a negative 0.1 interest rate on a small portion of commercial banks’ excess reserves. Some economists said raising rates on excess reserves is relatively easy for the BOJ to end that policy.
However, Kuroda has repeatedly said he cannot see any reasons to change the current policy any time soon as consumer prices are still far from the BOJ’s 2 percent inflation target.
Over the short term, there is a key resistance in green, the gap of which and the long-term support line in blue is narrowing. The long-term trendline shows that it’s now trading at the downtrend and standing right on the support. The later moving of the dollar against yen is not very clear as the gap of short-term resistance and support levels is becoming narrow and still waiting to breakout.
Chart 2: USDJPY Daily
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