USD/JPY Fundamental + Technical Macroeconomic Update | 3.14.23

The Japanese yen strengthened to 133 per dollar, reaching its highest levels in almost a month. This was due to the US regulators stepping in to protect depositors and financial institutions following the collapse of Silicon Valley Bank, causing speculation that the US Federal Reserve may take a less aggressive approach to policy tightening to avoid further risks to the financial system. Meanwhile, the Bank of Japan, under Governor Haruhiko Kuroda’s final policy meeting before retirement, maintained its ultra-low interest rates at its March meeting. Japanese policymakers made no indication of ending the bank’s yield curve control, preferring to hold off on big policy changes until Kuroda’s successor, Kazuo Ueda, steps in as head in April. The dollar index traded around 103.5 on Wednesday, nearing its weakest levels in a month. The recent turmoil in the US banking sector and the latest US inflation report caused investors to reassess the outlook for Federal Reserve monetary policy. Fresh data showed that the annual inflation rate in the US slowed further to 6% in February, in line with expectations. This led to money markets pricing an 80% chance of a 25 basis point rate hike from the Fed next week, lower than the half-percentage point increase expected a week ago. In the stock market, the Nikkei 225 Index rose 0.2% to above 27,250 while the broader Topix Index gained 0.7% to 1,960 on Wednesday, with banking stocks leading the rebound. The collapse of Silicon Valley Bank and Signature Bank had caused concern, but investors were hopeful that the worst of the fallout had passed. Financial stocks led the advance, with gains from Mitsubishi UFJ (4.3%), Sumitomo Mitsui (2.6%) and Mizuho Financial (2.4%). Minutes from the Bank of Japan’s January meeting showed that members reiterated the need to maintain ultra-easy policies, stating that it will take time to achieve the 2% inflation target in a sustainable and stable manner. Overall, there was optimism in the market, with investors betting on a smaller interest rate hike by the Federal Reserve next week.