The dollar/yen fell for the fourth consecutive session on Friday and could be set for even further decline based on fundamental and technical factors. Most of the selling over the past week has been fueled by weakness in global equity markets.
At a time of market uncertainty, investors tend to park their money in the safe haven of the Japanese yen. The tumble in stock markets in Asia, Europe and America last week was fueled by nervousness about the pace of central bank tightening and weak economic data.
On Friday, the USD/JPY settled at 113.699, down 0.438 or -0.38%. The Invesco CurrencyShares Japanese Yen Trust ETF closed at $82.57, up $0.42, or +0.51%.
Dollar/yen fell in tandem with Treasury yields ahead of the Federal Reserve meeting.
The USD/JPY also came under pressure along with US Treasury yields on Friday as investors waited for this week’s Federal Reserve meeting for more clarity on the prospects for rate hikes.
Expectations that the Fed would tighten faster than previously expected had seen yields and the dollar rise earlier last week. Also, despite Friday’s weakness, the US dollar was still on track for its best performance since December.
US Treasury yields fell as falls in equity markets reflected low risk appetite, while worries over a possible conflict in Ukraine fueled demand for safe-haven bonds.
Short term outlook
Futures markets are pricing in up to four rate hikes this year from March and expect the Fed to start trimming its balance sheet of over $8 trillion within months. This week’s Fed meeting may shed light on how quickly it will tighten.
Last week’s price action suggests that a two-way trade is possible as bullish investors eye an aggressive Federal Reserve and bearish traders face a possible Russian invasion of Ukraine.
Investors’ focus could shift back to the Fed on Monday after Goldman Sachs said over the weekend that inflation could force the Fed to raise rates more than four times this year. This could provide support for the USD/JPY earlier in the week.
Regarding Ukraine/Russia, there were no major developments over the weekend. However, Foreign Minister Blinken warned of a harsh response if a single Russian force invades Ukraine in an aggressive manner.
Bottom Line: Look for a potential two-sided trade where bullish traders are betting on a more aggressive Fed and bearish traders are reacting to weakness in the stock market.
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