Yen Recovers, Calm Before the Storm?

Investors cautious on Japanese Yen ahead of FOMC and BoJ decisions

The Japanese Yen (JPY) recovered slightly after falling in the Asian session, but the possibility of a sharp increase remains unlikely, as the market expects the Bank of Japan (BoJ) to keep interest rates unchanged this week.

US bond yields have also risen recently on expectations that the US Federal Reserve will pause interest rate cuts, reducing the appeal of the low-yielding yen.

However, concerns about geopolitical risks, trade wars, and cautious market sentiment may support the yen as a safe-haven asset. Investors are also holding back on major decisions ahead of key events: the Fed meeting ends on Wednesday and the BoJ decision is due on Thursday. Still, the current situation favors those betting on a weaker yen.

Yen forecast to remain under pressure

Japan's trade deficit narrowed sharply in November, from 462.1 billion yen (October) to 117.6 billion yen, according to the Japanese Ministry of Finance. This was mainly due to a 3.8% year-on-year increase in exports, supported by a weak yen and strong demand from the US and China.

However, imports fell 3.8%, and expectations that the BoJ will not raise interest rates this week caused the yen to continue to sell off.

Meanwhile, the yield on the 10-year US Treasury note rose to its highest level in nearly a month, helped by positive US retail sales data for November, which showed consumers remained strong in spending.

The Commerce Department said retail sales rose 0.7% in November, up from 0.5% the previous month. However, sales excluding autos rose just 0.2%, below expectations.

While the data did not change expectations that the Fed would cut interest rates by another 0.25% at its meeting this week, there were signs that the Fed could pause rate cuts in January.

Investors will be paying close attention to the economic forecasts and Fed Chairman Jerome Powell's remarks after the meeting. All eyes will then be on the BoJ's policy decision on Thursday, which promises to be a major mover for USD/JPY.

According to Lao Dong, updated at 3:00 p.m. on December 18, the USD/JPY exchange rate is currently fluctuating around 153.566 USD/JPY, meaning 1 USD can be exchanged for about 153.5 JPY.