USD/JPY Rangebound Ahead of Next Week’s Fed Decisions

The Dollar/Yen is trading mixed early Thursday as investors continue to assess the potential impact of the widely expected Federal Reserve interest rate increase in March on the spread between U.S. Government bond yields and Japanese Government bond yields. Fundamental data aside, it’s the interest rate differential that drive the price action.

At 03:31 GMT, the USD/JPY is trading 114.318, up 0.004 or +0.00%. On Wednesday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $82.15, up $0.26 or +0.32%.

Wednesday Recap:  Yields and the Fed’s Next Move

The U.S. Dollar slid against the Japanese Yen on Wednesday, with U.S. Treasury yields retreating as well after hitting roughly two-year peaks on 2-year and 10-year notes, but the greenback remains well-supported as investors prepared for the widely telegraphed rate hike at the Fed meeting in March.

U.S. 10-year Treasury yields touched a new two-year high of 1.902% on Wednesday, but was down 4 basis points at 1.8271%.

The Fed will meet next week and will likely provide clarity and details on the end of quantitative easing (QE), possibly in March. The U.S. central bank could also signal it will raise interest rates in March as well, right after ending QE.

Fed funds futures have fully priced in a rate hike in March and four in all for 2022.

Dollar Reacts to US Homebuilding Data

The greenback trimmed losses after data showed U.S. homebuilding unexpectedly increased in December amid unseasonably mild weather. Housing starts rose 1.4% to a seasonally adjusted annual rate of 1.702 million units last month.

U.S. homebuilding rose to a nine-month high in December amid a surge in multi-family housing projects, but soaring prices for materials after the government nearly doubled duties on imported Canadian softwood lumber could hamper activity later this year, Reuters reported.

The report from the Commerce Department on Wednesday also showed the housing construction backlog surged to a record high last month, underscoring the challenges builders are facing from supply strains, including labor shortages. Completions tumbled as well. Rising mortgage rates could also restrain homebuilding.

Housing starts rose 1.4% to a seasonally adjusted annual rate of 1.702 million units last month, the highest level since March. Economists polled by Reuters had forecast starts falling to a rate of 1.650 million units.

Japan’s December Exports Grew Faster than Expected

Japan’s exports rose faster than expected in December to mark the 10^th straight month of year-on-year growth, data showed on Thursday, as supply bottlenecks continued to ease toward the end of 2021.

Exports increased 17.5% in December from a year earlier, Ministry of Finance data showed, compared with a 16.0% gain expected by economists in a Reuters poll and following a 20.5% increase in the previous month.

Imports by value surged 41.1% on higher raw material costs and a weak yen, compared with expectations of a rise of 42.8% and growth of 43.8% in November.

This led to a trade deficit of 582.4 billion Japanese Yen ($5.09 billion) in December, compared with expectations for a gap of 784.1 billion Yen. November’s trade deficit totaled 955.6 billion Yen.

Short-Term Outlook

Despite the short-term setback, the USD/JPY is expected to remain well-supported as we advance through 2022. The current price action suggests traders are taking profits and lightening up ahead of next week’s Federal Reserve monetary policy decisions.

Traders could also be looking for guidance, which could come next week when the Fed is likely to explain when it will end quantitative easing and when it will make its first rate hike. The timetable on future rate hikes could also be released.