The Japanese yen is in trouble. The USD/JPY exchange rate is in its third straight week of gains and is now sitting at its highest point in over 30 years. This performance means that yen is the most underperforming currency in the developed world.

The USD/JPY pair has surged even after the Bank of Japan delivered its first interest rate hike in over 17 years this month. It boosted rates from minus 0.1% to 0.0% and ended its bond-buying process.

In theory, these actions are positive for the Japanese yen but the opposite is happening. That’s because of a situation known as buying the rumour, and selling the news. 

In this case, most analysts were already expecting that the BoJ would hike rates in its June meeting, as I wrote here. As such, the Japanese yen strengthened slightly before the rate cut and has now reversed.

The other reason is that the spread that has existed between US and Japanese interest rates will remain for a long time. This spread stands at 5.50% today since US rates stand at between 5.25% and 5.50%.

The market is unconvinced that the Fed will deliver three rate cuts as it hinted in last week’s monetary policy meeting. Besides, US inflation remains at an elevated level, with the core Consumer Price Index (CPI) sitting at 3.8%. 

There are signs that inflation will continue rising. The price of crude oil has jumped to $85 while the average gasoline price spiked to $3.50. Cocoa, the ingredient used to make chocolate, has gone parabolic while insurance costs are soaring.

Therefore, the interest rate differentials have formed a good carry trade opportunity. Carry trade is a situation where investors borrow in low-interest rate environments like Japan and invest in high-rates places like the US.

The ongoing yen plunge could lead to government interventions as we saw in 2022 when the government spent $60 billion. Those interventions led to a 16% currency jump.

 In a statement on Wednesday, the Finance Minister said that the government was watching the currency with a “high sense of urgency.”

USD/JPY chart by TradingView

Turning to the weekly chart, we see that the USD to JPY exchange rate has made a lot of gains since 2020. Now, the pair is sitting at an important level, where it has struggled to move above in three occasions. In technical analysis, this pattern is known as a triple-top and is usually a bearish sign.

The USD/JPY pair remains above all moving averages, which is a positive sign. Therefore, there is a likelihood that the pair will continue rising in the coming weeks. But this view will be confirmed if it moves above the triple-top level of 152.

The alternative scenario is where government interventions lead to a sharp decline of the USD/JPY. If this happens, it could move to 148.

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