USDJPY ADVANCED OUTLOOK
US10Y=4.348% WEEKLY HIGH 4.436%
DXY=97.664$ weekly low 96.871
FED INTEREST RATE HELD STEADY LAST MEETING BY FOMC VOTE 4.25%-4.5%
Heads of the Federal Reserve (Fed) and Bank of Japan (BOJ)
Federal Reserve (Fed)
Chair: Jerome H. Powell
Term: Powell has served as Chair of the Board of Governors of the Federal Reserve System since February 5, 2018. He was reappointed for a second four-year term on May 23, 2022, which is set to run until May 2026.
Background: Powell is an American investment banker and lawyer, known for his consensus-building approach and steady leadership during periods of economic uncertainty. He has been a member of the Board of Governors since 2012.
Bank of Japan (BOJ)
Governor: Kazuo Ueda
Term: Kazuo Ueda has served as Governor of the Bank of Japan since April 2023. He is a distinguished academic with a PhD in economics from MIT and has guided the BOJ through its recent policy normalization and interest rate increases.
Key Executive: Koji Nakamura was appointed as the BOJ’s Executive Director overseeing monetary policy and financial markets in April 2025, supporting Governor Ueda in policy implementation.
BOJ ( BANK OF JAPAN) 10 year bond yield
JP10Y=1.491% HIGH FOR THE WEEK 1.515%
BOJ INTEREST RATE =0.5%
Interest Rate Differential:
US Federal Reserve rate: 4.25%–4.50%.- BOJ 0.5%=3.75%-4%
the interest rate differential favor USD LONG
Bank of Japan (BoJ) rate: 0.5% comes in higher giving yen a shot advantage ,on monthly TF USDJPY remains bearish.
10-Year Bond Yield Differential:
Us10y 4.35% -JP10Y 1.515%= 2.835%
The bond yield spread continues to favor the dollar, attracting capital to US assets.
Monetary Policy Outlook:
The BoJ remains cautious, signaling a slow pace of further tightening.
The Fed is expected to maintain higher rates in the near term, though some easing is anticipated later in 2025.
Technical and Fundamental Summary
Trend: USD/JPY remains in a bullish trend, we will have upside potential if US yields stay elevated and BoJ remains dovish.
the monthly TF remains bearish and its something to watch.
The USD/JPY pair is expected to remain supported above 145 as long as the interest rate and bond yield differentials favor the US.
Upside risks exist if US economic data outperforms or if the BoJ maintains its cautious stance.
Downside risks could emerge if the Fed signals faster rate cuts or if there is a significant shift in risk sentiment favoring the yen.
In summary:
USD/JPY is trading near 146.231, with the US dollar supported by higher interest rates and bond yields relative to Japan. The pair’s direction will remain sensitive to central bank policy signals and global risk sentiment in the coming weeks.
1. Uncovered Interest Rate Parity (UIP) –
Uncovered Interest Rate Parity (UIP) is a fundamental theory in international finance and foreign exchange markets. It states that the difference in interest rates between two countries should equal the expected change in their exchange rates over the same period. The concept assumes no arbitrage opportunities and that investors are risk-neutral.
Implication:
If one country has a higher interest rate, its currency is expected to depreciate by the same amount as the interest rate differential.
Carry Trade:
If UIP holds, there is no excess return from borrowing in a low-interest currency and investing in a high-interest one, as exchange rate movements offset the interest rate advantage.
Covered vs. Uncovered:
Covered Interest Rate Parity (CIP): Uses forward contracts to hedge exchange rate risk.
Uncovered Interest Rate Parity (UIP): No hedging; relies on expected spot rates.
Example:
If US rates are 4.5% and JPY rates are 0.5%, UIP predicts the US dollar will depreciate by 4% against the JAPANESE YEN over the period, making returns equal after accounting for currency changes.
Given the USD interest rate of 4.5% and the Bank of Japan (BOJ) interest rate of 0.5%, the Uncovered Interest Rate Parity (UIP) and Covered Interest Rate Parity (CIP) conditions is as follows:
1. Uncovered Interest Rate Parity (UIP)
UIP states that the expected change in the spot exchange rate between two currencies equals the interest rate differential between those countries. In other words, the currency with the higher interest rate is expected to depreciate relative to the currency with the lower interest rate by roughly the interest rate differential.
Interpretation:
Since the USD interest rate (4.5%) is higher than the BOJ rate (0.5%), UIP predicts that the USD will depreciate against the JPY by approximately the interest rate differential of 4.0% annually.
This means that although USD offers higher yields, investors expect the USD to weaken relative to JPY over the investment horizon, offsetting the higher interest return.
2. Covered Interest Rate Parity (CIP)
CIP states that the forward exchange rate should adjust to offset the interest rate differential, eliminating arbitrage opportunities by using forward contracts to hedge exchange rate risk.
With USD rates higher than JPY rates, the USD is expected to trade at a forward discount relative to JPY, meaning the forward USD/JPY rate will be lower than the spot rate to compensate for the higher USD interest rate.
This ensures no arbitrage profit from borrowing in JPY and investing in USD while hedging currency risk.
This implies the forward rate is about 151.82 USD/JPY, higher than the spot rate, indicating a forward premium on USD relative to JPY.
Note: This suggests USD is trading at a forward premium, which contradicts the earlier interpretation. This discrepancy arises because in USD/JPY quoting, USD is the base currency and JPY the quote currency. The direction of the interest rate differential effect depends on the quoting convention.
Important Clarification on Quoting Conventions:
USD/JPY is quoted as Japanese yen per 1 US dollar.
When the domestic currency is USD, and foreign currency is JPY, the formula applies as above.
Since USD interest rates are higher, the JPY is trading at a forward discount relative to USD, meaning the forward USD/JPY rate is higher than the spot rate (USD is expected to appreciate).
Summary:
Aspect Result / Interpretation
Interest Rate Differential USD 4.5% vs. JPY 0.5% → 4.0% differential
UIP Prediction USD expected to appreciate against JPY by ~4% (due to quoting)
CIP Forward Rate Forward USD/JPY rate > Spot rate (USD at forward premium)
Carry Trade Borrow in low-rate JPY, invest in high-rate USD to earn carry
Conclusion:
With USD interest rate at 4.5% and BOJ rate at 0.5%, the covered interest rate parity (CIP) implies the USD will trade at a forward premium against JPY, i.e., the forward USD/JPY rate will be higher than the spot rate by roughly the interest rate differential.
The uncovered interest rate parity (UIP) suggests that investors expect the USD to appreciate against JPY by about 4% over the investment horizon, compensating for the higher USD interest rate.
This supports typical carry trade strategies where investors borrow in low-yielding JPY and invest in high-yielding USD assets, profiting from the interest differential.
#usdjpy #dollar #yen #jpy
US10Y=4.348% WEEKLY HIGH 4.436%
DXY=97.664$ weekly low 96.871
FED INTEREST RATE HELD STEADY LAST MEETING BY FOMC VOTE 4.25%-4.5%
Heads of the Federal Reserve (Fed) and Bank of Japan (BOJ)
Federal Reserve (Fed)
Chair: Jerome H. Powell
Term: Powell has served as Chair of the Board of Governors of the Federal Reserve System since February 5, 2018. He was reappointed for a second four-year term on May 23, 2022, which is set to run until May 2026.
Background: Powell is an American investment banker and lawyer, known for his consensus-building approach and steady leadership during periods of economic uncertainty. He has been a member of the Board of Governors since 2012.
Bank of Japan (BOJ)
Governor: Kazuo Ueda
Term: Kazuo Ueda has served as Governor of the Bank of Japan since April 2023. He is a distinguished academic with a PhD in economics from MIT and has guided the BOJ through its recent policy normalization and interest rate increases.
Key Executive: Koji Nakamura was appointed as the BOJ’s Executive Director overseeing monetary policy and financial markets in April 2025, supporting Governor Ueda in policy implementation.
BOJ ( BANK OF JAPAN) 10 year bond yield
JP10Y=1.491% HIGH FOR THE WEEK 1.515%
BOJ INTEREST RATE =0.5%
Interest Rate Differential:
US Federal Reserve rate: 4.25%–4.50%.- BOJ 0.5%=3.75%-4%
the interest rate differential favor USD LONG
Bank of Japan (BoJ) rate: 0.5% comes in higher giving yen a shot advantage ,on monthly TF USDJPY remains bearish.
10-Year Bond Yield Differential:
Us10y 4.35% -JP10Y 1.515%= 2.835%
The bond yield spread continues to favor the dollar, attracting capital to US assets.
Monetary Policy Outlook:
The BoJ remains cautious, signaling a slow pace of further tightening.
The Fed is expected to maintain higher rates in the near term, though some easing is anticipated later in 2025.
Technical and Fundamental Summary
Trend: USD/JPY remains in a bullish trend, we will have upside potential if US yields stay elevated and BoJ remains dovish.
the monthly TF remains bearish and its something to watch.
The USD/JPY pair is expected to remain supported above 145 as long as the interest rate and bond yield differentials favor the US.
Upside risks exist if US economic data outperforms or if the BoJ maintains its cautious stance.
Downside risks could emerge if the Fed signals faster rate cuts or if there is a significant shift in risk sentiment favoring the yen.
In summary:
USD/JPY is trading near 146.231, with the US dollar supported by higher interest rates and bond yields relative to Japan. The pair’s direction will remain sensitive to central bank policy signals and global risk sentiment in the coming weeks.
1. Uncovered Interest Rate Parity (UIP) –
Uncovered Interest Rate Parity (UIP) is a fundamental theory in international finance and foreign exchange markets. It states that the difference in interest rates between two countries should equal the expected change in their exchange rates over the same period. The concept assumes no arbitrage opportunities and that investors are risk-neutral.
Implication:
If one country has a higher interest rate, its currency is expected to depreciate by the same amount as the interest rate differential.
Carry Trade:
If UIP holds, there is no excess return from borrowing in a low-interest currency and investing in a high-interest one, as exchange rate movements offset the interest rate advantage.
Covered vs. Uncovered:
Covered Interest Rate Parity (CIP): Uses forward contracts to hedge exchange rate risk.
Uncovered Interest Rate Parity (UIP): No hedging; relies on expected spot rates.
Example:
If US rates are 4.5% and JPY rates are 0.5%, UIP predicts the US dollar will depreciate by 4% against the JAPANESE YEN over the period, making returns equal after accounting for currency changes.
Given the USD interest rate of 4.5% and the Bank of Japan (BOJ) interest rate of 0.5%, the Uncovered Interest Rate Parity (UIP) and Covered Interest Rate Parity (CIP) conditions is as follows:
1. Uncovered Interest Rate Parity (UIP)
UIP states that the expected change in the spot exchange rate between two currencies equals the interest rate differential between those countries. In other words, the currency with the higher interest rate is expected to depreciate relative to the currency with the lower interest rate by roughly the interest rate differential.
Interpretation:
Since the USD interest rate (4.5%) is higher than the BOJ rate (0.5%), UIP predicts that the USD will depreciate against the JPY by approximately the interest rate differential of 4.0% annually.
This means that although USD offers higher yields, investors expect the USD to weaken relative to JPY over the investment horizon, offsetting the higher interest return.
2. Covered Interest Rate Parity (CIP)
CIP states that the forward exchange rate should adjust to offset the interest rate differential, eliminating arbitrage opportunities by using forward contracts to hedge exchange rate risk.
With USD rates higher than JPY rates, the USD is expected to trade at a forward discount relative to JPY, meaning the forward USD/JPY rate will be lower than the spot rate to compensate for the higher USD interest rate.
This ensures no arbitrage profit from borrowing in JPY and investing in USD while hedging currency risk.
This implies the forward rate is about 151.82 USD/JPY, higher than the spot rate, indicating a forward premium on USD relative to JPY.
Note: This suggests USD is trading at a forward premium, which contradicts the earlier interpretation. This discrepancy arises because in USD/JPY quoting, USD is the base currency and JPY the quote currency. The direction of the interest rate differential effect depends on the quoting convention.
Important Clarification on Quoting Conventions:
USD/JPY is quoted as Japanese yen per 1 US dollar.
When the domestic currency is USD, and foreign currency is JPY, the formula applies as above.
Since USD interest rates are higher, the JPY is trading at a forward discount relative to USD, meaning the forward USD/JPY rate is higher than the spot rate (USD is expected to appreciate).
Summary:
Aspect Result / Interpretation
Interest Rate Differential USD 4.5% vs. JPY 0.5% → 4.0% differential
UIP Prediction USD expected to appreciate against JPY by ~4% (due to quoting)
CIP Forward Rate Forward USD/JPY rate > Spot rate (USD at forward premium)
Carry Trade Borrow in low-rate JPY, invest in high-rate USD to earn carry
Conclusion:
With USD interest rate at 4.5% and BOJ rate at 0.5%, the covered interest rate parity (CIP) implies the USD will trade at a forward premium against JPY, i.e., the forward USD/JPY rate will be higher than the spot rate by roughly the interest rate differential.
The uncovered interest rate parity (UIP) suggests that investors expect the USD to appreciate against JPY by about 4% over the investment horizon, compensating for the higher USD interest rate.
This supports typical carry trade strategies where investors borrow in low-yielding JPY and invest in high-yielding USD assets, profiting from the interest differential.
#usdjpy #dollar #yen #jpy
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The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.