FX.co ★ Yen – smells roasted again

The dollar burst on horseback in the new working week, and the USD/JPY pair regained strength. The asset jumped by more than 0.3% at the beginning of Monday and broke through the resistance at 144.

The dollar broke loose

Recall that last week the dollar-yen pair tickled the nerves of traders more than once, getting into a zone of increased turbulence.

First, on the increased monetary divergence between the US and Japan, the asset managed to reach a new 24-year high at 145.

And then, as a result of the currency intervention carried out by Japan in support of its national currency, the quote sharply collapsed from this peak by more than 500 points.

The intervention of the Japanese authorities helped JPY to complete the last seven days in a slight positive. This was the first weekly growth of the yen in a month.

However, as analysts predicted, the effect of unilateral intervention was short-lived. The USD/JPY pair started the new working week with a steady growth.

During the Asian session, the Japanese currency fell again against its US counterpart below the 144 mark.

The pressure on the JPY was exerted by a large-scale rally of the dollar. On Monday morning, the greenback reached another high against the euro and the pound.

Thus, the euro fell against the dollar by 0.4%, to $0.9654, as the Democrats lost to the far-right party in the parliamentary elections in Italy. Such an outcome opens the way to the political restructuring of the EU.

Meanwhile, the British pound fell in price against the dollar by 2.8%, to a record low of $1.0555. Fears of an even greater increase in inflation if the government implements a plan to reduce taxes contributed to the pound's fall.

At the time of release, the dollar strengthened on almost all fronts, as a result of which the DXY index soared by more than 0.5%, to a new 20-year peak at 114.58.

Why is the demand for USD growing?

The strong jump in the US currency was caused by an increase in anti-risk sentiment and an increase in the yield of 10-year US Treasury bonds.

World stock markets are falling now for two main reasons. The first is another escalation of the conflict between Russia and the West.

This time, relations have worsened amid referendums held by the Kremlin in the Luhansk and Donetsk People's Republics, as well as in the Kherson and Zaporozhye regions of Ukraine.

Moscow has promised to take these regions under full protection if they become part of Russia. Western politicians regarded this as a direct threat of the use of nuclear weapons.

Also, the growth of fears about the global recession contributes to a decrease in risk appetite. The wave of rate hikes observed last week significantly worsened forecasts for global economic growth.

As major central banks continue to raise rates, their economies are noticeably weaker. The only exception is the US.

Despite the fact that the Fed is at the forefront of tightening monetary policy, the American economy is still firmly on its feet.

This is evidenced by the latest US macro data published on Friday. A report from S&P Global showed that in September, the index of business activity in the manufacturing sector of America rose from 51.5 to 51.8, while its counterpart in the service sector recovered from 44.6 to 49.3.

Positive statistics helped to strengthen expectations of a more aggressive Fed policy, especially since at the end of the week, officials of the US central bank intensified their hawkish rhetoric.

On Friday, Fed Chairman Jerome Powell said that the central bank is determined to continue actively fighting inflation.

The comments of Fed Vice Chairman Lael Brainard and Atlanta Fed President Rafael Bostic were in the same spirit.

Hawkish speeches by politicians helped to disperse the yield of 10-year US Treasury bonds to 3.74%, which inspired the dollar to a new record.

You can't envy the yen

The aggressive position of the US central bank in relation to interest rates is what is now drowning the Japanese currency.

Despite the recently thrown lifeline in the form of intervention, the yen is increasingly sinking to the bottom and risks approaching the red line again – the 145 mark.

An additional ballast that does not allow the JPY to go up is the news about the next dovish actions of the Bank of Japan.

On Monday morning, it became known that the BOJ again decided to increase the volume of bond purchases, as the benchmark yield of 10-year Japanese bonds jumped to the upper limit of the acceptable trading range of the central bank.

Also, strong pressure on the JPY was exerted by the statement of the former chief currency diplomat of Japan, Naoyuki Shinohara.

In an interview with Reuters, the official said that the government is unlikely to go for another large-scale intervention, so as not to draw fire from other G7 participants.

– The most that the authorities can do now is to try to smooth out the volatility in the foreign exchange market with small purchases of the yen, but this will clearly not be enough to reverse the downward trend, – he stressed.

Nevertheless, traders playing bullish for the USD/JPY pair should be on their guard. Some analysts do not rule out that the Japanese authorities may again intervene, which will cause a short-term rebound of the quote.

This is evidenced by today's comments by Japanese Finance Minister Shunichi Suzuki. On Monday morning, the politician issued another warning:

"We are deeply concerned about the recent rapid decline of the yen, partly caused by speculative trading, and our position of readiness to respond to such steps as necessary has not changed," he said.

The increased risk of intervention may become a minor obstacle for bulls on the dollar-yen pair in the short term. However, most analysts believe that this week the asset will still move mainly in the upward direction.

In the coming days, the dollar may receive several more powerful impulses for growth, as a number of speeches by Fed representatives are expected throughout the week.

According to experts, American politicians will continue to bend the hawkish line, which will further add fuel to the fire of monetary divergence between the United States and Japan.

This will favor the dollar's growth, as a result of which the USD/JPY pair can demonstrate another record.