Why Is the Japanese Yen Under Pressure From Elevated Oil Prices and Wide Rate Differentials?

• USD/JPY moves higher, with Japanese Yen weakness and robust US jobs data underpinning the US Dollar.
• Pressure on the Yen persists as energy prices remain high and Japan faces an interest rate disadvantage.
• US midterm elections and US-Iran developments remain on traders’ radar ahead of employment releases.

A weaker Japanese Yen (JPY) and a firmer US Dollar (USD) push USD/JPY modestly higher on Tuesday. The Yen lags its major counterparts, while the Dollar draws support from better-than-expected US economic figures. Attention is also on the US midterm elections and US-Iran developments, which continue to drive volatility in Oil prices. The pair is trading near 158.50 at the time of writing, a gain of 0.37% for the day.

At roughly 101.90, the US Dollar Index (DXY) has rebounded from its intraday trough of 101.63. The index measures the Dollar against six major currencies. US JOLTS Job Openings increased from 7.19 million to 7.523 million in September, beating the forecast of 7.13 million.

Shifting headlines have sent Oil prices both higher and lower during Tuesday’s session. An initial advance followed a Wall Street Journal (WSJ) report of a US strike on Iran’s Qeshm Island. Crude subsequently retreated on unconfirmed reports of concessions by Washington and Tehran concerning Iran’s nuclear programme and frozen funds, before recouping part of the decline.

Despite continuing diplomatic efforts, the absence of a clear way forward in US-Iran talks keeps Oil prices elevated. Inflation risks stemming from energy costs are strengthening expectations that the Federal Reserve (Fed) will raise interest rates further. After increasing rates by 25 basis points (bps) in September, the Fed held them steady in October and reiterated its commitment to restoring price stability. According to the CME FedWatch Tool, traders assign a 75% probability to a further hike in December.

Expectations of additional tightening by the Bank of Japan (BoJ) have not relieved pressure on the Japanese Yen. With the energy shock also sustaining a hawkish stance among other major central banks, Japanese interest rates remain relatively low against those of its peers. This leaves the Yen at a yield disadvantage.

Heavy dependence on energy imports, especially Middle Eastern crude, makes Japan more vulnerable. Higher Oil prices increase its import costs and could act as a drag on economic growth.

US employment releases will take centre stage over the remainder of the week, with few events scheduled on Japan’s economic calendar. ADP Employment Change is due on Wednesday; Initial Jobless Claims follow on Thursday, ahead of Friday’s Nonfarm Payrolls (NFP) report.