Japanese Yen Surges Across FX Majors as Risk Aversion Intensifies

The Japanese yen surged against all FX majors on Thursday as risk aversion swept through global markets, sending USD/JPY to a three-week low. With Japan's inflation report due today and another BOJ meeting next week, the yen could have further room to strengthen as USD/JPY threatens to break below September's low.

USD/JPY Breaks Lower as Yen Bulls Eye Japan CPI and BOJ

The Japanese yen surged against all FX majors on Thursday, with USD/JPY falling towards 157 as a wave of risk aversion swept through global markets. Concerns over AI valuations, surging oil prices and political unrest in France encouraged safe-haven flows into the yen. Falling US Treasury yields also narrowed the US-Japan yield differential, adding to yen demand. The move appeared driven more by broader market sentiment than domestic developments, although it comes just a week ahead of the BOJ's next monetary policy meeting.

• EUR/JPY fell a full 1% to fresh multi-month lows, with the euro facing additional selling pressure from political unrest in France and widening French-German bond yield spreads.
• NZD/JPY led the declines, falling 1.1% and testing the 89 handle as risk aversion weighed on the commodity-sensitive New Zealand dollar.
• USD/JPY fell 0.8% to a three-week low during its worst session in nearly a month, helped by falling US Treasury yields and safe-haven demand for the yen.

• GBP/JPY erased four days of gains and closed below 210, although sterling remained relatively resilient against other European currencies amid expectations of further BOE tightening.
• CHF/JPY also fell as safe-haven flows favoured the yen over the Swiss franc, potentially reinforced by the BOJ's tightening bias ahead of next week's meeting.

Japan CPI in Focus Ahead of Next Week’s BOJ Meeting

Attention now turns to today's Japanese inflation report, with nationwide core CPI expected to accelerate to 2.1% y/y from 1.7%, taking it back above the BOJ's 2% inflation target. Tokyo's September inflation figures have already pointed to renewed price pressures, with core CPI rising to 2.7% from 1.8% in August.

More notably, Tokyo's core-core CPI (excluding fresh food and energy) accelerated to 3.0% y/y from 2.0%, while seasonally adjusted monthly inflation jumped 0.68%. While the expiry of temporary subsidies contributed to the broader rise in prices, the acceleration in core-core inflation suggests underlying price pressures remain elevated. A stronger-than-expected national CPI report could reinforce expectations of further BOJ tightening and provide another tailwind for the yen ahead of next week's policy meeting.

BOJ Expected to Hold in October, Hike in December

The BOJ is widely expected to hold rates at 1.25% next week, having already hiked in September. However, nearly 70% of economists in a Reuters poll expect another 25bp hike by year-end, with December the clear favourite. Updated inflation projections and Governor Ueda's guidance will be closely watched for clues on the timing of further tightening.

USD/JPY Technical Analysis: US Dollar vs Japanese Yen

We have finally seen the lower high I have been discussing since mid-September. Though in typical ‘turning point’ fashion, USD/JPY threw plenty of curveballs to cast doubt on the idea, threatening to break above 159.04 after establishing support above its 200-day EMA.

Thursday’s bearish candle shows clear range expansion to the downside following several weeks of compression. Last week’s shooting star marked a potential top on the weekly chart, snapping a four-week rally that was already showing signs of waning bullish momentum.

Note that one-week and one-month implied volatility levels are curling higher, suggesting more excitement ahead for yen traders. Risk reversals are also pointing lower, indicating increased demand for USD/JPY puts relative to calls.

The September low is the next support level to be tested, and close enough that it just might be. But it’s also an obvious area for bears to book profits and some bulls to seek a discount. With daily momentum aligning with the bearish structure on the weekly chart, a break below the September low is now my core bias, with a move towards the August low in focus.

Source: ICE, TradingView