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Why Fed Minutes Could Put Further Pressure on the Yen

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Japanese yen breaches 110 against US dollar

Last week, the Japanese yen (JYN) depreciated against the US dollar for the eighth consecutive week as the dollar continued its upward surge. It was the best run for the dollar against the yen since October 2014. The primary reason for the yen’s weakness is the widening spread between the US and Japanese treasuries, which is being driven by strong US economic performance compared to Japan. The Japanese economy contracted 0.6% on an annualized basis, breaking its positive run and adding to pressure on the yen.

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For the week ended May 18, the Japanese yen (FXY) closed at 110.75 against the US dollar (UUP), depreciating 1.3%. The Japanese equity markets (EWJ), on the other hand, continued their dream run with the 12th positive weekly close in the last 14 weeks. The Nikkei 225 (JPXN) posted a weekly gain of 0.76% for the week ended May 18. A weak yen is positive for the export-dependent Japanese economy.

Speculators pare bearish bets

Japanese yen (YCL) speculators decreased their bearish bets against the yen last week, primarily because of a technical resistance near 110 rather than any fundamental reasons. According to the latest Commitment of Traders report released on May 18 by the Chicago Futures Trading Commission, speculators on the Japanese yen had a net long position of 3,680 contracts on May 15 compared to 3,680 short contracts on May 8.

The outlook for the yen

The primary focus of traders this week is on the FOMC (Federal Open Market Committee) since there are no major reports from Japan this week. Three more possible rate hikes by the Fed could widen the yield spread and put downward pressure on the yen. Japan’s exports declined 7.8% in April, and that could add to selling pressure for Japan’s export-driven currency.

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