Japanese Yen Fourth Quarter Recap
The anti-risk Japanese Yen[1] had a mixed performance against its major peers throughout the fourth quarter of 2021. It weakened against haven-oriented currencies, such as the US Dollar[2] and Swiss Franc[3]. On the other hand, it found some strength against growth and cyclical-sensitive currencies such as the Australian, Canadian and New Zealand Dollars as volatility hit stocks.
Inflation and the Fed Remain the Focus in Q1 2022
For USD/JPY[4], the road ahead in the first quarter of 2022 will likely remain heavily glued to market expectations of how hawkish the Federal Reserve will be – see chart below. In December, the central bank doubled the pace of tapering asset purchases, which will now see it end in early 2022. This will likely give the central bank maneuverability should it need to raise rates sooner than expected.
This will of course depend on how inflation evolves. Headline price growth is at its fastest pace in almost 40 years in the United States. Expectations are that price growth will remain above the central bank’s target next year, with Core PCE running around 2.7% in 2022. However, a key risk could come if inflation expectations become “de-anchored.”
December 2022 Fed Rate Hike Bets Vs. USD/JPY
Chart Created Using TradingView
The Labor Market May Keep the Fed on its Toes, Will USD/JPY Rise?
When inflation expectations are anchored, it typically means that short-term price growth does little to impact long-run estimates. This could be due to people expecting the Federal Reserve to maintain its inflation target down the road. However, if consumers anticipate inflation to linger instead, then those estimates can become “de-anchored”.
This can occur when workers, facing high inflation, demand
