Japanese Yen Fiscal Worries: USD/JPY Levels at 158.39

USD/JPY attracted buyers for a second straight day but traded below the mid-158.00s on Monday, as Japanese yen fiscal worries and Middle East tensions supported the US dollar. The lack of follow-through leaves USD/JPY near key Fibonacci levels after roughly two weeks in a range.

Key Takeaways

Yen under pressure: Market anxiety over Prime Minister Sanae Takaichi's expansionary fiscal policies and public debt weighs on the yen.
Safe-haven dollar: The US-Iran standoff over the Strait of Hormuz and fighting between Houthis and Saudi Arabia keep a geopolitical risk premium in play.
Fed pricing: Bets on a rate hike at the late-October Fed meeting are being priced out, while a 25-basis-point December increase stays firmly on the table.

What Happened

USD/JPY found buyers for the second day running, but the move lacked strong follow-through in the European session. US bond yields pulled back slightly from multi-year highs, which limited the dollar's gains.

The 100-day simple moving average at 159.51 caps USD/JPY on the upside. The 50.0% Fibonacci retracement at 158.39 is the immediate support.

A daily close below 158.39 would expose the 38.2% retracement at 157.09, then 155.48 and about 152.88, the base of the current Fibonacci leg. Above 159.51, resistance sits at the 61.8% retracement of 159.69 and the 78.6% retracement of 161.55. The recent cycle high area is 163.90.

Background

Investors have been uneasy about Takaichi's spending plans and Japan's public debt. The government is reportedly considering another supplementary budget, to be compiled by November and passed through parliament by year-end.

Oil moved the other way. Crude fell on hopes that a Russia-Ukraine energy ceasefire will ease global fuel shortages and reduce inflation risks.

Market Impact

USD/JPY: Fiscal concerns in Japan pull one way and shifting Fed rate-hike pricing the other, which has kept USD/JPY range-bound for about two weeks.
Gold: The metal slid from a one-week high to a fresh daily low near $4,170 in the early European session.
AUD/USD: It traded below 0.7000 in the Asian session, with a bearish gap and thin holiday liquidity.
Bitcoin: It was around $83,600 after a 3.1% correction last week. US-listed spot Bitcoin ETFs recorded a $681.10 million outflow, snapping a three-week inflow streak.

What to Watch Next

US inflation figures: The latest release this week bears on how Fed rate-hike expectations for December develop.
Fed Chair Kevin Warsh's speech: He speaks on Friday at the IMF/World Bank annual meetings in Bangkok.
Japan's supplementary budget: It may be compiled by November and passed by year-end, a direct test of the fiscal concerns weighing on the yen.

Bottom Line

USD/JPY is caught between fiscal pressure on the yen and a dollar supported by geopolitical risk. The 158.39 support and the 159.51 moving average now frame the range. US inflation data, Warsh's Friday speech and Japan's budget plans are the next inputs.

Japanese yen fiscal worries lift USD/JPY buyers for second day