The Japanese Yen Talking Points

• USD/JPY edges back above the 145.00 mark
• Japan’s latest wage data cast doubt on durable domestic demand rise
• US CPI numbers will be the next major market hurdle

The Japanese Yen has fallen back to mid-December’s lows against the US dollar on Wednesday as more weak wage data out of Japan weigh on any idea that tighter monetary policy there could be coming anytime soon.

Japanese workers’ real, inflation-adjusted wages were found to have slipped for a thirteenth straight month in November, according to official figures. Indeed, they were down an annualized 3%, after falling 2.3% in October. Nominal pay grew by a pretty miserable 0.2%, much less than the 1.5% expected.

These data are important for the foreign exchange market because the past few months have seen growing suspicions that the Bank of Japan’s long period of extremely accommodative monetary policy could be coming to an end. Those suspicions helped the Yen gain against the Dollar quite consistently since November 2023.

However, the BoJ has always been at pains to point out that any monetary tightening on its part will have to come on hard evidence that demand and inflation in Japan are sustainable. The global wave of inflation which washed around the world last year certainly didn’t spare Japan, but, now that it seems to be subsiding, domestic Japanese pricing power looks as elusive as ever.

Those latest wage data appear to underline that fact, and, sure enough, some bets on any early-year tightening from the BoJ seem to have been taken off the table, with the Dollar back above the psychologically important 145-Yen mark.

The US Dollar, of course, is also under some pressure thanks to the widely held belief that the Federal Reserve will be cutting interest rates this year, possibly in the first six months. But it has found some support this week in rising Treasury yields. Moreover, even if US borrowing costs start to fall, the Dollar would still offer much more tempting returns than the Yen. In any case, investors must wait until January 23 until the BoJ will make its first policy call of the year.

US inflation numbers are the next big market event and they come much sooner, on Thursday. Core consumer prices’ increase is expected to have decelerated in December, but headline inflation is tipped to have risen modestly. The core measure will carry more weight with the markets but there seems little clear reason to expect a near-term reversal in Dollar strength against the Yen in any case.

USD/JPY Technical Analysis

USD/JPY has risen quite solidly in the last seven daily trading sessions and has in the process broken above a downtrend line preciously dominant since November 10. Still the pair remains within a broad trading range bounded by December 7’s opening high of 147.32 and December 28’s five month intraday low of 140.164. If Dollar bulls can consolidate above the 145.00 handle this week, they will strike out for resistance at the first Fibonacci retracement of the rise up to November’s peaks from the lows of late March. That comes in at 146.54, a level abandoned on December 7 and not reclaimed since.

Setbacks will find near-term support at 143.37, January 3’s closing high, ahead of 140.88, the most recent significant low.

USD/JPY Daily Chart

Chart Compiled Using TradingView

IG’s own sentiment data shows traders quite bearish on USD/JPY at current levels, with fully 66% bearish. This seems a little overdone considering the backdrop of fundamental support for USD/JPY even if the prospect of lower US rates is likely to weigh on the Dollar against other currencies.

The real picture looks a lot more mixed and is likely to remain so at least until the markets have seen the substance of this weeks’ US inflation figures. Even given its recent vigor, the Dollar doesn’t look at all overbought according the pair’s Relative Strength Index. That is still hovering around the mid-50 mark, well shy of the 70 level which tends to suggest extreme overbuying.

--By David Cottle for DailyFX

https://www.dailyfx.com/news/japanese-yen-falls-further-on-weaker-wage-data-us-cpi-in-near-term-focus-20240110.html