Japanese yen sets sail for new lows and the Chinese yuan may ebb that way as well

USD/JPY hit a 20-year peak today and the Japanese yen depreciation story could have ramifications for the Chinese yuan if the April rally in CNY/JPY is anything to go by.

The Japanese yen depreciated significantly in March and through to the end of April. Although many Japanese government officials talked about their ‘concern’ for FX volatility, a weaker yen was seen as a positive for their policy goals.

A problem arose when the CNY/JPY cross rate hit its highest level since the early 1990s on 19th April. China and Japan are the second and third largest economies in the world by GDP respectively. They are within close geographic proximity.

The impact of this fairly sudden appreciation in China’s currency against that of one of its major trading partners has led to the Peoples Bank of China (PBOC) devaluing the yuan against the US dollar.

When the yuan started depreciating against USD, USD/JPY decelerate in its ascension to set up a 126.30 – 131.30 range for 7-weeks. It broke the topside on Monday this week and this has once again pushed CNY/JPY screaming higher.

The chart below shows the onshore CNY and the offshore CNH against the Yen and the US dollar, as well as USD/JPY. Traders will be watching for opportunities in another move north for USD/CNH.

This bout of yen cheapening has been triggered by a number of factors. It seems that elevated crude oil prices flowed into higher inflation expectations that has reignited concerns of an aggressive Fed rate hike path. This, in turn, has led to higher Treasury yields across the curve.

The Japanese economy is heavily reliant on importing energy. Alongside crude oil, gasoline, natural gas, heating oil and diesel are all becoming more expensive. The Bank of Japan has made it clear that will be maintain very loose monetary policy, including keeping long term yields low.

All this stacks up against the yen and its hard to see anything changing anytime soon. In an interview with Bloomberg 3 weeks ago, former Japanese vice finance minister, Eisuke Sakakibara, said that he could see USD/JPY at 150.

He is known as ‘Mr Yen’ for his masterminding of intervention in his tenure at the helm. He went on to say that he does not expect intervention from Japanese authorities for now.

To get to 150, USD/JPY would first need to clear a couple of high-water marks from early 2002, just above 135.

Looking ahead, Japanese PPI and trade data is due out tomorrow.

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