Japanese yen near 4-year low

The Japanese yen is trading quietly in the Wednesday session as the currency continues to have a quiet week. Currently, USD/JPY is trading at 114.27, down 0.28% on the day.

Yen stumbling on yield differentials

The US dollar has been in retreat mode against many of the majors in the month of October, but a notable exception has been the Japanese yen, which continues to get pummelled by the greenback. Last week, USD/JPY climbed 1.78%, its best weekly performance since March 2020. Earlier on Wednesday, USD/JPY climbed to 114.69, its highest level since March 2017.

Why has the yen been such easy prey for the dollar? The answer appears to be the widening spread between US and Japanese sovereign yields in the past few weeks. The 10-year yield differential has widened by 20 basis points since late September, and this sent the yen sharply lower since the currency is extremely sensitive to the yield differential.

The yen is also being hobbled by expectations that the Japanese government will embark on another massive stimulus package after the national elections on October 31st. Prime Minister Fumio Kishida should easily win the election, and will likely implement additional monetary easing and spending in order to push inflation higher, as the weak economy could exhibit deflation.

With the US and Japan heading in opposite directions on monetary and financial policies, I would not be surprised to see USD/JPY could continue to rally and move towards the 120-level in the short term. Finally, the surge in oil prices is also weighing on the yen, since oil prices are denominated in US dollars. The Japanese government will not mind a weaker yen, as this would help boost the country’s export sector.

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USD/JPY Technical

• The pair tested a major barrier at 114.50. If this line falls, there is no significant resistance until 1115.93
•  There is support at 112.79, followed by 111.31

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