🏯 USDJPY drops over 1%

Yen gains amid minimum wage increase and rate hike expectations

USDJPY pair is dropping below 155 today, with the yen gaining over 1% for the second consecutive day, driven by several factors. NBH television reported today that the Japanese government decided to raise the hourly minimum wage by 50 yen to 1054 yen for the current fiscal year. A higher minimum wage naturally hints at potential inflationary pressure, which could seal the deal for an interest rate hike in July or later in the year. Expectations indicate a 68% probability of a rate hike on July 31, and suggest over two full hikes of 10 basis points by the end of the year.

Interest rate expectations in Japan. Source: Bloomberg Finance LP, XTB

Another factor is investor positioning in anticipation of the end of favorable "carry trade" conditions in currency pairs involving the yen. BoJ rate hikes and rate cuts by other central banks, including the Fed, will reduce the interest rate differential. The return of capital to Japan additionally strengthens the yen. Therefore, we observe not only the dollar weakening against the yen but also the Mexican peso and Antipodean currencies. Interestingly, Donald Trump recently commented on the yen's excessive weakness, expressing his reluctance for other countries to have a significantly better position relative to the United States due to their currency.

The USDJPY pair has reached its lowest level since mid-May today, falling not only below 155 but also below 154. During yesterday’s session, the pair crossed below the 100-day SMA. Previously, this average was breached in January and March, and the pair stayed below it for an extended period of time in November-December last year. If a similar situation occurs now, the pair could drop below 149 to the vicinity of the 61.8% retracement of the last upward wave, placing the pair at its lowest level since March. On the other hand, the pair has a long way to go, first needing to overcome the 38.2% retracement and then drop to the vicinity of the 50.0% retracement and the range of the previous significant correction, which occurred at the end of last year. 

Source: xStation5