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How will Fed rate hike affect USD/JPY pairing?

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Naoto Arase, Head of the Fintech Department at PPLS.

How will Fed rate hike affect USD/JPY pairing?

The USD/JPY currency pairing plunged from 133.01 to 131.01 after the Federal Reserve raised interest by 25 percentage points, with the decision by the US central bank’s rate-setting Federal Open Market Committee (FOMC) on Wednesday the week’s main financial event.

With the Ichimoku Kinko Hyo indicator expected to reverse in the three main factors of Sanyaku – suggesting a strong sell signal in the next few days – sentiment, from a technical point of view, can be judged to be weak.

In terms of fundamentals, there are some indicators that investors and traders should take into consideration.

First, despite UBS’ rescue purchase of Credit Suisse, major central banks boosting dollar liquidity and intervention by US Treasury Secretary Janet Yellen, concerns remain about the global financial system.

While anxiety has temporarily receded after Yellen’s remarks that government intervention was necessary to “protect the broader banking system”, without a substantial resolution, caution will be required when the risk-off phase resumes after the cycle has run its course.

Furthermore, with the phrase “ongoing increases” having been deleted from the FOMC statement, there are obser-vations the US Federal Reserve Board will suspend monetary tightening.

Another indicator are predictions the Japan-US interest rate differential will narrow, with observations the yen carry trade will be dissolved.

Finally, there is also the yen’s status as a “safe haven” currency. The safe haven currencies generally bought during a risk aversion phase are the yen, the US dollar and the Swiss franc, but with the US and Switzerland the epicentres of the current credit uncertainty, the yen is likely to be preferred.

The forecast therefore is for a continuation of the dollar-selling/yen-buying trend as the main scenario, which is a combination of risk-averse yen-buying and dollar-selling due to a drop in US interest rates and yen-buying due to the cancellation of the carry trade.

The focus on Thursday was on the 2002 fourth quarter current account balance, the February Chicago Fed National Activity Index, US new jobless claims, February new home sales and the Kansas City Fed March Manufacturing Activity Index.

If the US fundamentals prove to be worse than expected, the US dollar/yen pairing may further fall and then accelerate as the US economy enters a recession, so caution is required.

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