USD/JPY returns above 159.00 with Iran’s peace deal on tenterhooks
- USD/JPY keeps trimming the previous days' losses and returns to levels below 159.00.
- Doubts about Iran's peace deal are keeping the US Dollar dips limited.
- US CPI data due later today might provide further insight into the Fed's monetary policy stance.
The US Dollar (USD) remains steady, relatively close to the key 160.00 level against the Japanese Yen (JPY) on Friday, as the fragility of the ceasefire in Iran has prompted investors to cut down US dollar shorts. The pair has extended its recovery from weekly highs at 157.88 on Wednesday, returning to the 159.20 area at the time of writing.
Growing concerns about the fate of the US-Iran peace process have been weighing on risk appetite on Friday. Iranian authorities cast doubt on their participation in the peace negotiations, which are expected to start in Islamabad, Pakistan, on Saturday. The US, on the other hand, complains about Tehran’s poor handling of the sea traffic through the Strait of Hormuz, which does not show any significant improvement.
The Yen dropped nearly 2% in March, as the Oil shock caused by the war in Iran heightened investors’ concerns about stagflation, particularly in a major Oil importer like Japan. Upside risk on inflation has raised questions about the contrast of Prime Minister Sanae Takaichi’s stimulus plans to shield households from the rising prices and the pressure on the Bank of Japan (BoJ) to hike interest rates.
Japanese producer prices data have reinforced those worries. Mach’s Producer Prices Index (PPI) accelerated to a 2.6% year-on-year advance, from 2.1% in February, while the monthly PPI jumped to 0.8% from 0.1% in the previous month.
Later on Friday, the focus will shift to the US Consumer Price Index (CPI) data from March. Consumer inflation is expected to have jumped 3.3% in the last 12 months, its highest level in nearly two years. This might tip the scales of a hitherto balanced Federal Reserve (Fed) forward guidance, giving hawks further reasons to reverse the current easing cycle.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.