November 28 , 2022 2:05 AM ET
By:AnalysisWatch
The USD/JPY is struggling to capitalize on Friday's modest bounce and is coming under renewed selling pressure on the first day of the new week. The pair remains on the supply side until the early European session and is currently flirting with the daily low in the 138.30–138.25 area.
The worsening COVID-19 situation is leading to inflows into the Japanese yen, which is putting downward pressure on the USD/JPY pair. Indeed, China reported a record-breaking number of daily infections on Saturday, forcing the government to take strict measures against COVID in several cities. In addition, public discontent over the "zero COVID" policy sparked protests across China and fueled concerns about a further slowdown in economic activity. This, in turn, is keeping investors on edge and increasing demand for traditional safe-haven assets.
The flight to safety and the growing acceptance of a less aggressive Fed tightening policy continue to drive down U.S. government bond yields. This is leading to a further narrowing of the interest rate differential between the U.S. and Japan, which is providing an additional boost to the Japanese yen.
Nevertheless, the slight strength of the U.S. dollar provides some support for the USD/JPY currency pair.
This and the strongly divergent monetary policy stances of the Federal Reserve and the Bank of Japan could help to limit further losses, at least for the time being.
Despite a dovish assessment of the November Federal Open Market Committee (FOMC) meeting minutes, the U.S. central bank is expected to hike rates by another 50 basis points in December. In contrast, the BoJ has so far shown no inclination to raise rates.
Moreover, BoJ Governor Haruhiko Kuroda reiterated that the central bank will maintain its monetary easing to support the economy and achieve the 2% inflation target in a stable manner. Therefore, in the absence of relevant economic data, caution is advised before making new bearish bets on the USD/JPY currency pair.
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