- USD/JPY is experiencing some strength after Wednesday’s sharp drop.
- After bouncing off 114.00, strong US data, risk appetite and stimulus news from Japan support the case for a higher USD/JPY.
After enjoying its biggest one-day drop since August on Wednesday, USD/JPY is trading a bit firmer on Thursday. USD/JPY hit its highest levels since early 2017, just below the 115.00 level early in Wednesday’s session. But then reversed sharply to end the session just above 114.00, down 0.64%.
The pair has recovered a little since Thursday’s Asian session, when it continued to flirt with the 114.00 mark. It is currently trading at 114.40, up 0.3 percent on the day. With bulls eyeing a push of the 114.50 mark.
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The main driver of Wednesday’s drop was a decline in U.S. bond yields
The main reason for the loss on Wednesday was a drop in US bond yields, which fell from a three-week high of 1.65 percent to below 1.60 percent.
The 10-year yield remained constant at the start of the US trading session, giving the USD/JPY exchange rate no momentum. Buying on the dips, which has been a lucrative strategy for USD/JPY traders in 2021. Additionally is likely to be the cause of the rally.
Japanese government decided on a ¥55T fiscal spending package.
Fundamental trends also appear to strengthen the argument for the USD/JPY to regain the ground it lost on Wednesday. Weekly initial jobless claims fell to a new post-pandemic low of 269,000, and the Philadelphia Fed’s manufacturing index showed strengthening business conditions in early November, according to data released on Thursday.
Meanwhile, last night’s reports from Japan revealed that the Japanese government had settled on a considerably larger than projected 55 trillion yen fiscal stimulus program, the world’s largest of its kind. According to analysts, Japan’s fiscal stimulus boosts equities but has little impact on government bond yields due to the Bank of Japan’s yield curve control program. Stronger Japanese stocks, according to analysts, boost hedging requirements, causing outflows (and JPY selling).
Risk appetite is strong elsewhere, with US markets reaching record highs, reducing demand for the safe-haven yen. Rate differentials between the US and Japan are anticipated to remain the key driver of the pair in general.
Danske Bank wrote in a report released earlier this week that they “continue to expect two Fed rate rises in 2022 (September and December), but see upside risks to this estimate, with potentially earlier and greater rate hikes than we forecast.” As a result, we believe that “ten-year US Treasury yields will hit 2% in the next 6 to 12 months.”