US Dollar Japanese Yen Exchange Rate Buoyed by BoJ Dovishness

Although support for the US Dollar was somewhat limited at the start of the week this was not enough to prevent the USD JPY exchange rate making fresh gains.

BoJ to Remain Dovish for Foreseeable Future

Confidence in the Yen weakened sharply in response to the latest commentary from Bank of Japan (BoJ) Governor Haruhiko Kuroda.

Markets were unimpressed by Kuroda’s stance on monetary policy, as he recommitted the BoJ to its current path of ultra-loose policy and low interest rates.

While this was not a particularly surprising development this was still enough to push the USD JPY exchange rate to its highest level since March, as investors piled out of the Yen once again.

With interest rates apparently set to stay at their current low levels for some years to come the appeal of the Yen is likely to remain distinctly limited.

This disappointment overshadowed a solid uptick in October’s services and composite PMIs, given that the BoJ is unlikely to be moved by any positive data until inflation starts to pick up in earnest.

US Dollar Struggles to Capitalise on Yen Softness

Even so, the upside potential of USD exchange rates remains somewhat limited at this juncture.

Although the latest US labour market data showed a solid rebound from September’s hurricane season weakness the positivity of the report was tempered by weaker-than-expected wage growth.

While the odds continue to favour a December interest rate hike from the Federal Reserve this has already been effectively priced into the US Dollar.

This is likely to prevent the USD JPY exchange rate from extending its gains significantly in the near term.

As analysts at ANZ noted:

‘Powell represents continuity, and his view is largely consistent with Yellen’s gradual tightening, so it’s business as usual at the Fed. Meanwhile, the tax bill has already run into opposition and, in its current form, it looks more like a starting point for negotiation designed to pass the House and then be re-shaped in the Senate. This suggests the path to tax reform has a long way to go.

‘In terms of Fed’s talk, we’ll keep an eye on Dudley and his comments on inflation and wages, as the ‘low-inflation, strong-growth’ theme continues to cast a shadow on the tightening path.’

Weak Data to Maintain Pressure on JPY

Additional jitters are likely to be in store for the Yen if September’s leading and coincident indexes show a loss of momentum on the month.

Weaker domestic data would only entrench the dovish outlook of BoJ policymakers further, suggesting that the Japanese economy remains in a less robust state of health.

However, if the economy shows signs of strengthening this may offer some degree of support to the bearish Yen on Wednesday.

Any significant uptick in general market risk aversion could also benefit the Yen this week.