Those who trade forex might benefit from knowing that the USD/JPY pair reached its highest value in five years on Dec. 26, and then ticked up slightly on the following day, as global market participants responded to speculation surrounding the future policy moves of the Japanese government and its central bank.
On the first day, the dollar rose to as much as 104.84 yen, according to Bloomberg. This represented the highest value for the USD/JPY pair since October 2008. On the next day, the currency pair rose to 105.08, Reuters reported.
USD/JPY lingers at five-year high
The dollar kept rising against the yen at a time when many market experts believe that the Bank of Japan will soon have to take further action to utilize policy to stimulate the economy, since a sales tax will be implemented in April and there is speculation that the country’s inflation will reach a high point in the near future, according to the news source.
Any policies involving monetary easing will simply add to the actions that the BOJ has taken to stimulate an increase in the Asian nation’s price level, the media outlet reported. The financial institution has been harnessing robust stimulus in an effort to jumpstart the economy of the country and help fend off deflation, according to Bloomberg.
Alternatively, the Federal Reserve announced at the conclusion of a recent policy meeting its plans to reduce stimulus. At the end of this event, it was indicated that starting in January 2013, the central bank will purchase $75 billion worth of debt-based securities every month. This amount is slightly lower than the $85 billion per month that the Fed has been purchasing since 2012.
While this central bank has indicated its plans to lower its stimulus, the BOJ purchases 7 trillion yen ($67 billion) worth of bonds every month to increase the money supply and put upward pressure on the price level, the media outlet reported.
“The fact that BOJ members are concerned that improvement in growth, jobs, and consumer prices may not be as robust as before signals they will take some kind of measures going forward,” Takahiro Sekido, who was previously employed by the BOJ and now works for Bank of Tokyo-Mitsubishi UFJ Ltd. as a Japan strategist, told the news source. “Dollar-yen could test 105 as economic data in the U.S. continue to improve.”
Amid the continued efforts of this financial institution, the dollar was most recently on track to record its ninth straight weekly loss against the yen, Reuters reported. In the event that the most recent period ends up being another one where the greenback appreciates relative to the Japanese currency, it will be the longest streak of such gains since 1974.
Impact of government bonds
Another factor that could help motivate those who trade forex to seek out the dollar instead of the yen is the higher yields that are being paid by U.S. government bonds when compared to debt-based financial instruments being issued by Japan, according to Reuters.
At the time of report, 10-year bonds issued by the government of the Asian nation were only paying a yield of 71 basis points, which is far below that of the U.S. debt-based securities, the media outlet reported. If the Fed continues to reduce its monthly bond purchases, this development could help make the gap between the yields of the financial instruments issued by the governments of the two nations larger. One person who noted the key role that the bond yields play in the USD/JPY was Chris Weston, chief market strategist at IG in Melbourne.
“USD/JPY continues to move towards my long held year-end target of 105.00 and is clearly getting a helping hand by the fact that the U.S. 10-year treasury is at 2.99 percent and testing the September high of 3 percent,” he stated, according to the news source.
The Fed will need to have favorable economic data in order to keep reducing its bond purchases, and it received one more piece of information that would seemingly motivate it to lower these transactions when the U.S. Labor Department released a report indicating that during the week ending on Dec. 21, the number of jobless claims dropped by a large figure that surpassed expectations, Bloomberg reported.
The median forecast of economists who took part in a poll conducted by the media outlet was for the number of these weekly applications for unemployment benefits to decline to 345,000. However, the data provided by the government agency revealed that 338,000 of these claims were made during the period.
This most recent data was supplied after the Labor Department released a report earlier in December indicating that job growth was strong in November. Data provided by the government agency revealed that during the month, the unemployment rate declined to 7 percent from 7.3 percent and payrolls rose by more than 200,000. This data might be helpful to those who trade forex.