Oversold JPY Unlikely to Turn the Table with Possibly Slight Recovery

JPY fell by 9.25% since the early 2021 against the USD, and dropped over 10% against the CAD, becoming the weakest currency among the industrial countries this year. Japanese yen performed badly during the first six months of 2021 because of a widening bond spread between the US and Japan caused by an overall increase of the US treasury bond. At the same time, US stocks have been reaching a record high, along with a fall in risk aversion, heaping continuous pressure on the JPY. The economic recovery and increasing inflation in some countries such as Canada, New Zealand, Australia and the US have made their central banks start or plan to quit the Quantitative Easing (EQ) policy, among which New Zealand has begun an interest rate hike.

By contrast, it takes a long journey for Japans economic recovery and interest rate hike by the Bank of Japan. Suga Yoshihide, ex-Prime Minister, went his own way to hold the Tokyo 2020 Games, resulting in a sharp loss of supports from the Japanese people and then stepping down. Under the effect of political and economic factors, JPY becomes the target of carry traders again. At the end of Q3, 2021, energy shortage occurred in some countries, boosting up the prices of coal and natural gas used for electric power generation and crude oil futures and taking a heavy toll on the Japanese industry.

Generally speaking, all the political and economic events in the financial market have an adverse influence on JPY. Therefore, the JPY still dropped against the USD, although the US dollar index fell back last week. Thus it can be seen that JPY is impossible to bounce off, though the US dollar index decreases. So carry traders wont miss the opportunity to sell the Japanese yen, facing continuously surging energy prices, the US treasury bond yield and the US dollar index, as well as the potential entry into interest rate hikes in other countries.

As for a heavily oversold JPY, some analysts argue that its time to buy the currency at a relatively low price. But I believe the JPY may stage a slight recovery when confronted with the fact of being oversold and then stay weak continuously, because the fatal factor that leads to a falling JPY is likely to be worse. So affected by rising energy prices, the global inflation and the US 10-year treasury bond yield increase, in addition to earlier interest rate hikes by central banks in some countries with possible hawkish measures. Therefore, the JPY is prone to remain bearish due to the widening bond spreads between these countries and Japan.