After Monday’s rebound, the dollar was coming under pressure again at the time of writing on Tuesday. As we reported yesterday, the Federal Reserve’s likely two further rate hikes in 2018 are well documented and probably priced in.
With President Donald Trump also criticising the Fed’s interest rate rises last week, yield-seeking investors are probably looking at other countries’ currencies where the central bank is turning or about to turn hawkish – such as the Canadian dollar, the euro and possibly even the pound. Even the likes of lower-yielding currencies such as the Japanese yen and Swiss franc are finding support as the dollar comes under profit-taking pressure. The same is true for gold and silver.
Meanwhile the Japanese yen strengthened at the end of last week and in early parts of this as the nation’s 10-Year bond yields rose noticeably to levels last seen in early February.
As part of its QE, the Bank of Japan conducts unlimited buying of bonds to keep the 10-year JGB yields below a certain level. However, the BOJ is apparently having second thoughts about that strategy. According to some reports, the BOJ has held preliminary discussions on making changes to interest rate targets and stock buying techniques as it tries to make its stimulus programme more sustainable. This has led to speculation that the BoJ’s moves would mark the start of the end of the era for extraordinary loose monetary policy. If these reports were to be confirmed then the yen could strengthen a lot further and weigh on the USD/JPY.
For now though the USD/JPY is clinging onto an important bullish trend line after the rally came to an abrupt halt around the 113 handle last week. While a couple of important support levels such as 112.05 and 111.35 have broken down, the USD/JPY is yet to break its market structure of higher highs and higher lows. But if the most recent low at 110.80 breaks, then this would be a bearish development in the short-term outlook.
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