Factors Influencing the Foreign Exchange Market’s Yen Exchange Rate and Interest Rate Trends

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Trends in the Yen Exchange Rate in the Foreign Exchange Market

In the Tokyo foreign exchange market, the yen exchange rate has been hovering around 149 yen per dollar in the latter half of the 20th. The previous week’s trend of yen appreciation has paused, with a slight adjustment in levels. Behind this lies the accumulation of speculative yen-selling positions, making it likely for buy positions to adjust holdings. On the 17th, the rate hit a low of 150.78 yen and later rose to 149.20 yen, reaching levels last seen on October 31. According to Keiichi Iguchi, Senior Strategist at Resona Holdings Market Planning Department, there has been a shift in momentum since last week, attributed to the decline in U.S. long-term interest rates below 4.5%, leading to a stronger trend of dollar depreciation.

Given this situation, there is a likelihood of an upper limit constraint on the yen exchange rate, with a risk of yen appreciation up to the mid-148 yen range. It is expected that any retracement would likely be capped around the mid-150 yen level. Consequently, in the foreign exchange market, amidst the ongoing fluctuations in the yen exchange rate, investors and traders need to exercise caution in their transactions.

Impact of U.S. Interest Rate Trends on the Yen Exchange Rate

The trends in U.S. interest rates significantly influence the yen exchange rate, especially the decline in U.S. long-term interest rates contributing to yen appreciation. With a prevailing trend of dollar depreciation, the yield on U.S. 10-year Treasury bonds dropped to the mid-4.43% range on the 17th, briefly hitting around 4.37%, marking a nearly two-month low. Consequently, the yen surpassed 150 yen against the dollar, correlating with the European session’s decline in U.S. long-term interest rates.

As per the Commodity Futures Trading Commission (CFTC), leveraged funds’ net short positions in yen reached a substantial scale since April 2022. This factor continues to be a driving force in the volatility of the yen exchange rate, indicating that U.S. interest rate trends will likely continue to influence the yen exchange rate.

Weekly Schedule and the Impact of Market Participants

The weekly schedule, including Japan’s Labor Thanksgiving Day and the Thanksgiving holiday in the U.S., is expected to lead to a decrease in market participants. A reduction in market participants towards the weekend is anticipated to impact trading activities. Iguchi suggests that if there is any trigger for a reduction in yen shorts due to position adjustments, coupled with a general trend of dollar depreciation, there is a possibility of yen appreciation.

The decrease in market participants towards the weekend could potentially affect the yen exchange rate, with careful position adjustments being a focal point. Market participants are likely to prioritize risk management ahead of the holidays, leading to a tendency of subdued fluctuations in the yen exchange rate. Consequently, attention should be paid to the yen exchange rate’s movements leading up to the weekend.

Impact of Leverage Funds and the Possibility of Position Adjustments

The increase in net short positions in yen by leverage funds is influencing fluctuations in the yen exchange rate. The substantial scale of net short positions in yen since April 2022 exerts consistent pressure on the market. Potential position adjustment movements could lead to significant fluctuations in the yen exchange rate.

As leverage funds hold yen as a selling position, this becomes a factor contributing to yen depreciation. If position-adjusting movements occur, there is a potential for a rapid shift in market direction, leading to yen appreciation. In such a scenario, market participants need to remain sensitive to the movements of leverage funds and exercise caution regarding fluctuations in the yen exchange rate.

Correlation between Financial Markets and Crude Oil Prices

The movements in financial markets are correlated with the rise in crude oil prices, influencing the yen exchange rate. Particularly, U.S. long-term interest rates are sensitive to fluctuations in crude oil prices. On the 17th, U.S. long-term interest rates temporarily returned to a stable range against the backdrop of the rise in crude oil prices. However, the yen exchange rate continued to rise due to real demand and buying related to options.

The increase in risk appetite among financial market participants due to the rise in crude oil prices is contributing to the fluctuation of the yen exchange rate. The correlation between financial markets and crude oil prices influencing the yen exchange rate underscores the need for continued attention to these factors. The dynamics of financial markets and fluctuations in crude oil prices have the potential to influence the direction of the yen exchange rate, requiring market participants to monitor these factors consistently.