The Japanese Yen (JPY) keeps drifting lower on Tuesday, unfazed by the mild US Dollar’s weakness.
The USD/JPY pair has reached session highs at 162.70 during the European trading session, less than 15 pips below the 40-year high of 162.84, which is seen as the new line in the sand for Tokyo intervention
The US Dollar is showing a moderately offered tone on Tuesday as investors cling to optimism amid reports that US and Iranian authorities are reviewing a peace proposal submitted by mediators that might avoid the conflict escalating out of control. Interest rate divergences are crushing the Yen The Yen, however, remains on its back foot as the recent rally in Oil prices adds pressure on major central banks to tighten their monetary policies further, increasing the interest rate divergence with the Bank of Japan (BoJ). BoJ officials have reiterated their commitment to tighten their monetary policy further, but investors are sceptical that interet rates might be raised much higher than 1.25% in the near term, as they would jeopardise the Japanese Government’s efforts to boost economic growth.
This leaves the Yen at the mercy of carry traders, whose strategy consists of borrowing low-yielding currencies to exchange them for higher-yielding ones, and pocket the differential, therefore fuelling massive JPY- short positions. In the Japanese calendar, the main focus this week is on June’s National Consumer Prices Index (CPI) figures, which are expected to show a mild uptick, following soft readings in the previous two months. The Yen would need a positive surprise on inflation to renew pressure on the BoJ to hike rates and keep JPY sellers at bay, at least for some time.