Hot US Inflation Propels USD/JPY to Worrying Levels

Japanese Yen (USD/JPY) Analysis

• Dollar response to hot CPI data sends USD/JPY higher
• USD/JPY enters a danger zone as the FX intervention threat looms
• Dollar yen breaks 152.00 and enters overbought territory
• Elevate your trading skills and gain a competitive edge. Get your hands on the Japanese Yen Q2 outlook today for exclusive insights into key market catalysts that should be on every trader’s radar:

Dollar Response to Hot CPI Data Sends USD/JPY Higher

The disconnect between the dollar and US yields in recent trading sessions presented an opportunity for USD bulls to bridge the gap if inflationary pressures showed up in the March CPI report. Indeed, US CPI beat consensus estimates across the board with headline and core inflation surpassing expectations on both the year-on-year as well as month-on-month readings.

In the buildup to the data, US 10 and 2-year treasury yields had been rising steadily while the US dollar – via the US dollar basket (DXY) – was experiencing a decline. In response to the inflation data, US yields shot up even more, compelling the dollar to follow suit, resulting in a higher USD/JPY price. The chart below highlights the move in USD/JPY and the increasing yield differential between the US and Japan which is helping to drive the carry trade.

USD/JPY Daily Chart with the US/Japan 10-year yield differential

Source: TradingView, prepared by Richard Snow

USD/JPY Enters a Danger Zone as the FX Intervention Threat Looms

With USD/JPY around 153.00, both the finance minister and deputy finance minister issued their displeasure at the unfavourable volatility associated with the yen’s recent decline. The messages echoed what we have heard before however, the finance minister Mr Suzuki addressed the levels of 152.00 and 153.00 when explaining it is not the level of dollar yen that is in focus, rather the background that has led to the weakness. Nevertheless, USDJPY trades above the prior intervention level (152.00) and appears to hold comfortably around 153.00.

The chart below provides context for the pair, charting a new path at such elevated levels. The blue and red rectangles have been used as guides based on the average price move exhibited over the last two quarters. The potential upside target appears unrealistic as the finance ministry and BoJ are likely to intervene well before prices get that high, while the downside level may come into play should FX intervention be deployed to strengthen the yen amid the prospect of another rate cut from the BoJ later this year. One thing that continues to work against the yen is the fact that the carry trade is still very appealing, borrowing yen at low interest rates to invest in the higher-yielding USD. Additionally, given strong economic, jobs and inflation data, the Fed is likely to consider fewer rate cuts this year and potentially deciding to hold rates at current levels.

USD/JPY Weekly Chart

Source: TradingView, prepared by Richard Snow

The dollar yen pair is one of the most liquid, most highly trades pairs in the word. It has strong links to international trade and is well known for facilitating the ‘carry trade’ . Find out more by reading the DailyFX guide below:

USD/JPY Breaks 152.00 and Enters Overbought Territory

USD/JPY held the overnight level, around 153.00 as the pair enters overbought territory. Before the bullish catalyst, the pair had traded within a narrow range beneath the 152.00 marker. The risk-to-reward ratio of a bullish continuation appears highly unfavourable at such elevated levels. Keep an eye out for communication suggesting the BoJ/finance ministry has contacted banks looking for FX quotes – if the prior intervention playbook can be used.

USD/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX