The USD/JPY exchange rate has suffered a remarkable reversal in the past few weeks as the Federal Reserve and Bank of Japan (BoJ) divergence continues. It has dropped for four consecutive weeks and reached a low of 149.54, down from the year-to-date high of 161.76.
Why has the USD/JPY retreated?
The USD/JPY has retreated primarily because of the ongoing divergence between the Federal Reserve and the Bank of Japan (BoJ). In its interest rate decision on Wednesday, the bank decided to leave interest rates unchanged between 5.25% and 5.50%. That decision did not catch investors off-guard since it was in line with what analysts were expecting.
Why is Japan's USD/JPY performance a sign that investors are unwinding?
It came two days after Japan published weak industrial production data. At the same time, the USD/JPY performance is a sign that investors are unwinding the most popular carry trade in the market. A carry trade is a situation where investors borrow a cheaper currency than the JPY and invest in a higher-yielding one.
