For the second day in a row, the price of the USD/JPY currency pair is trying to rebound to the upside, after strong and sharp selling to the currency pair. This is while calming the tightening tone on the part of the US Federal Reserve at the time of writing the analysis.

What contributed to the positive results of the recent US economic data, is the clear divergence in the future of monetary policy between the Bank of Japan and the US Central Bank will continue to stimulate the currency pair to rebound upward at any time.

In general, the US dollar erased more than half of this year's gains amid declining demand for a safe haven, driven by growing bets that the US Federal Reserve will ease its aggressive interest rate hikes and reopen China. The Bloomberg Dollar Spot has shrunk this year to around 7% after rising as much as 16% earlier as a slower-than-expected rise in consumer prices and comments from Federal Reserve Chairman Jerome Powell fueled speculation that the Fed will slow down the pace of raising US interest rates next week.

Accordingly, the dollar scale fell at the beginning of this week's trading, recording its lowest level since June 28, with the rise of high-risk currencies. The gauge is set to decline for the fifth day, the longest losing streak since April 2021 after Shanghai and Hangzhou eased some Covid restrictions in a move toward reopening the world's second-largest economy. Commenting on this, Christopher Wong, currency analyst at Overseas Chinese Banking Corp. in Singapore, said: “Expectation of China reopening, Fed policy calibration are key themes that should keep risk proxies such as commodity-linked currencies supported,” and the jobs report. Last Friday's strong US Non-Farms just saw an unexpected rebound in the US dollar.”

The world's worst-performing major currency looks set for an impressive turnaround in 2023 as the two main drivers — the hawkish Federal Reserve and the dovish Bank of Japan — swap places in the eyes of some investors. The yen -- a favored short-hand against the dollar for the majority of this year -- could rise more than 7% from current levels next year, according to Barclays Plc and Nomura Holdings Inc., while Vontobel Asset Management AG said the fair value is less than 100 per dollar - 30% stronger. State Street Global Markets sees a quick recovery as fears of higher US interest rates ease, while T. Rowe Price said there is room for gains in the more hawkish Bank of Japan.

The upside is a marked change of tune since September when hedge funds couldn't get enough of selling the yen - a high-profile victim of the Bank of Japan's ultra-loose monetary policy. The widening yield gap between the United States and Japan, with the former, aggressively raising interest rates and the latter at record lows to boost the economy, has helped push the currency down as much as 25% this year.

A combination of direct market intervention from the Japanese government and hopes the Fed will slow the pace of rate hikes has helped the yen rise more than 12% from its October lows. Speculation about a possible policy adjustment from the Bank of Japan - which will be under new leadership from April - is likely to add fuel to this recovery. A stronger yen could reverberate across the borders of the world's third-largest economy, potentially drawing hundreds of billions of dollars of capital into Japan while hurting the profits of the country's export giants. It would also dampen demand for the popular yen trade - investors borrow the low-yielding Japanese currency to invest in higher-rate currencies and pocket the difference. The yen traded around 135 against the dollar yesterday - before that it hit a three-decade low of 151.95 in October.
 

Forecasts of the US dollar against the Japanese yen today:

• The general trend of the USD/JPY currency pair is still bearish.
• According to the performance on the daily chart below, the USD/JPY currency pair will not return to the bullish trend without moving toward the resistance levels of 138.80 and 140.00, respectively.
• On the other hand, according to the performance over the same time period, the move below the support level of 134.30 will be important to confirm that the bears are ready for further decline.

(Click on image to enlarge)

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