Dollar Strength, Yen Weakness Continues

The week commenced with the USD/JPY opening at 151.47. Early in the Tokyo session on November 13, the yen saw selling activity without any significant news catalyst. Despite appearing somewhat top-heavy above the end-October high of 151.74, the USD/JPY climbed to 151.92 as overseas traders entered the market in response to increased UST yields and dollar appreciation.

However, concerns of potential intervention by Japanese authorities, especially as the pair approached last year's high of 151.94, led to a swift decline to the lower 151 level. Subsequently, the pair recovered to above 151.50 on November 14. Following the release of the October CPI report during US trading hours, which fell below market forecasts, UST yields dropped sharply, causing the dollar to weaken across the board. This resulted in a rapid fall of the USD/JPY to below 151, extending further to 150.17 due to intermittent selling.

During this period, yen cross rates rose, with the EUR/JPY reaching a new high. The USD/JPY recovered to around 150.50 on November 15 but faced downward pressure from moves to reverse the previous day's rise in yen cross rates when European traders entered the market. After the October PPI announcement in US trading hours indicated softer-than-expected figures, the USD/JPY briefly fell to a weekly low of 150.05. However, a subsequent sharp rise in US interest rates propelled a quick rally, pushing the pair back above 151.

Approaching 151.50 on November 16, the USD/JPY became top-heavy once again, driven partly by concerns of intervention by Japanese authorities. In US trading hours, a weaker-than-expected import price index for October and higher-than-forecasted new jobless claims from the previous week led to another decline, bringing the pair to around 150.50. As of the report's writing on November 17, the USD/JPY continued trading around this level.

Throughout the week, both the dollar and yen weakened, with yen cross rates rising. The release of the US CPI for October, showing slower-than-expected growth, contributed to this trend. Despite earlier concerns about the CPI overshooting expectations, subsequent data releases, including PPI and import prices, missed forecasts, leading to a shift in market sentiment. The CME FedWatch tool indicated reduced expectations for further rate hikes, with the FF interest rate futures market projecting a complete end to the current rate hike cycle and anticipating rate cuts in 2024.

As of the report's writing, the 10-year UST yield had fallen below the previously observed 4.50%. The upcoming release of FOMC meeting minutes on November 21 and the Thanksgiving holiday in the US were highlighted, with expectations for the dollar to continue weakening. The US Senate passing a stopgap spending bill on November 15 was seen as mitigating the risk of sudden market fluctuations.

Regarding the BOJ, expectations of policy normalization were pushed back due to Governor Kazuo Ueda's perceived dovish comments. While the BOJ's October policy revisions hinted at the potential for higher long-term interest rates, the prevailing view suggested a near-term rise was unlikely. This provided a sense of security for overseas traders to engage in yen-selling trades. Despite Governor Ueda not denying the BOJ's normalization goals, he emphasized the need to avoid strong remarks that could pose unexpected risks to the markets. This cautious stance indicated that sentiments about the BOJ's monetary policy were unlikely to change in the near term.

The report expressed the expectation of continued weakening for both the dollar and yen. Ongoing concerns about foreign exchange intervention by Japanese authorities were predicted to constrain upside movements in the USD/JPY. While MOF officials did not issue heightened warnings against yen weakness during the week, Vice Finance Minister Masato Kanda's statement about the government being on "stand by" continued to exert influence. Caution was advised regarding potential authority-driven fluctuations in the USD/JPY, with the specified trading range for the currency pair at 149.00 - 152.00.

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