JPY Weekly - 13 November 2023

Week in review

The USD/JPY opened the week at 149.45. It dropped sharply following the US payrolls report announced on 3 November, staying at this level over the weekend, and hovered around 149.50 on Monday 6 November in the Tokyo session in the absence of any notable news. There were no notable developments after overseas investors came online, but the USD/JPY recovered to the 150 level at the end of the session amid a rise in UST yields, which was possibly partly due to a sense of caution ahead of the UST auction. The pair continued to rise on 7 November in the Tokyo session. The RBA's dovish rate hike sparked dollar buying against the AUD which spread to other major currencies, gradually lifting the USD/JPY as well. UST yields declined following a smooth result to the 3y UST auction on 7 November, but the yen weakened because the rise in expectations that the Fed would stop raising rates following the payrolls report lifted risk sentiment and share prices. This trend continued on 8 November. The yen continued to weaken, and the USD/JPY rose to around 151 amid a continued fall in yields following a smooth outcome to the 10y UST auction. The pair became top-heavy above 151 on 9 November in the Tokyo session as its recent high came into view, but stayed at this level after European investors entered the market. The USD/JPY rose to the low-to-mid 151 level during the New York session as UST yields rose sharply and the dollar strengthened following a lackluster 30y UST auction result and Fed Chair Jay Powell's comment that the Fed would not hesitate to raise rates if necessary. It is now approaching its recent high (Figure 1).

The dollar strengthened across the board this week, dispelling the softness that followed last Friday's payrolls report. Commodity currencies were relatively soft, with the AUD weakening following the RBA's monetary policy decision and the NOK hit by declining oil prices (Figure 2).

FIGURE 1: USD/JPY

Note: Through 11:00am JST on 10 November

Source: EBS, Refinitiv, MUFG

FIGURE 2: MAJOR CURRENCIES' RATE OF CHANGE VS USD THIS WEEK

Note: Through 11:00am JST on 10 November

Source: Bloomberg, MUFG

CPI and stopgap spending bill pose risks

The US payrolls report announced on 3 November showed a rise in the unemployment rate, a slowdown in MoM job growth, and a slowdown in MoM average hours earnings growth, signaling an easing of tight labor market conditions across the board. This fueled expectations that the Fed would halt its rate hikes, resulting in UST yields falling across a wide range of maturities and the dollar weakening almost across the board. The spotlight this week was therefore on how Chair Powell and other Fed officials would interpret the data. However, in a speech on 9 November, Powell said the Fed was not confident it had achieved a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2% over time and that "If it becomes appropriate to tighten policy further, we will not hesitate to do so." It is probably safe to assume that Powell said this to pull back dovish expectations that had spread through the market. As a result, the 2y UST yield, which had been declining, recovered to above 5%, and the 10y yield avoided falling below 4.5%, which is the lowest point since last month. We expect UST yields to face upward pressure in the near term and the dollar to remain strong.

Next week the focus will be on the US CPI for October, which will be released on 14 November. This will not be the final indicator of whether the Fed will hike one more time this year because the FOMC meeting is still some time away, but the market will be closely watching whether the data will satisfy Fed officials that progress is being made on bringing inflation down. However, Chair Powell's most recent statements suggest risk is to the upside. US government talks on a stopgap spending bill will soon come to a head. US House Speaker Mike Johnson has floated the possibility of extending funding through to 15 January 2024, but we will need to closely monitor news on the situation since the current stopgap bill expires on 17 November.

BOJ's communication seems dovish

Meanwhile, BOJ Governor Kazuo Ueda's comments have been frequently making headlines, including from his talks with business leaders on 6 November and consecutive days of parliamentary hearings. The BOJ has revised its yield curve control policy and is moving toward normalization, but Governor Ueda's statements so far have given the impression of being restrained and dovish. This has pulled back expectations of policy normalization, and the yen's weakness this week, including in yen cross rates, suggests that yen sellers have actually become increasingly reassured. We doubt the Bank will radically change its communications in the near term, meaning the yen is likely to remain weak. We expect the USD/JPY to test its recent high at end-October of 151.74 or last year's high of 151.94 unless US CPI misses market expectations, UST yields turn lower again, and the dollar weakens.

However, we see a renewed sense of caution about foreign exchange intervention by the Japanese authorities. On 1 November, Vice Finance Minister for International Affairs Masato Kanda said the authorities were on "standby" to deal with one-sided, sharp moves in the yen. This unprecedentedly strong language held back USD/JPY upside. We will need to pay close attention to such warnings from the authorities from next week as the USD/JPY is again on the verge of breaking past recent highs. The authorities could interpret a move beyond recent highs next week as a rapid price movement that has been set as a condition for market intervention. Taking this into account, we expect upside will depend on whether the USD/JPY temporarily breaks past its recent high.

Forecast range

USD/JPY: 149.00 - 152.50