Forex Market Volatility Week: Yen Depreciation Triggers Risk Alerts, and the Logic Behind the Aussie Dollar's Plunge

Weekly Market Overview

In the past week (12/15-12/19), global currency markets showed a divergence pattern. The US Dollar Index rose slightly by 0.33%, while non-US currencies performed variably. The Japanese Yen experienced the steepest decline, depreciating by 1.28% over the week; the Euro slightly fell by 0.23%; the Australian Dollar followed suit with a 0.65% decline; only the British Pound edged up marginally by 0.03%.

The continued weakening of the AUD also dragged down the AUD/CNY performance. Against the backdrop of global risk assets under pressure, the AUD/CNY exchange rate faced stress, reflecting market caution towards risk assets.

European Central Bank Holds Steady, Fed Rate Cut Expectations Shift

ECB Maintains Policy, Market Disappointed

Last week, ECB President Lagarde did not deliver the hawkish signals expected by the market, causing the EUR/USD to rise initially and then fall, ultimately closing at this week’s lows.

The data was also less than ideal. November US non-farm payrolls showed mediocre performance, and November CPI was also below expectations. Both Morgan Stanley and Barclays issued warnings, noting that current data are heavily affected by seasonal adjustment biases, making it difficult to accurately reflect true trends.

Doubts Over the Fed’s 2026 Rate Cut Outlook

The market consensus currently expects the Fed to cut rates twice next year, with a 66.5% probability of a rate cut in April. However, this expectation’s stability is waning.

Danske Bank offers an insightful view: while the ECB maintains its rates, the Fed is about to begin a rate-cut cycle, which will gradually narrow the interest rate differential and push the euro higher. Meanwhile, European asset markets are gradually recovering, the dollar’s depreciation risk hedging needs are increasing, and concerns about the US economic outlook are deepening—all factors that could support the euro’s strength.

Technical Outlook Still Shows Upside Potential

EUR/USD remains firmly above multiple moving averages, with the possibility of breaking above the short-term high of 1.18 still intact. If it falls below, the 100-day moving average at 1.165 will serve as a key support.

Yen Depreciation Accelerates, Government Intervention Window Approaching

“Dovish Rate Hike” Sparks Depreciation Wave

USD/JPY rose 1.28% over the week, approaching the 158 level. The main driver is the Bank of Japan’s “dovish rate hike.” Although the BOJ raised rates by 25 basis points as expected, Governor Ueda’s comments were notably dovish, and the new cabinet approved ¥18.3 trillion in stimulus spending, fully offsetting the tightening effect of the rate hike.

Market now predicts that the BOJ will only cut rates once by 2026, with Sumitomo Mitsui Banking Corporation’s analysis being more pessimistic: the next rate hike might not occur until October 2026, and the yen could depreciate to 162 in the first quarter of next year.

Signs of Government Intervention Growing Clearer

However, JPMorgan issued a warning: if the yen depreciates past the 160 level in the short term, Japanese authorities will view this as abnormal volatility, significantly increasing the likelihood of intervention.

Nomura Securities offers a different outlook, believing that under the Fed’s rate cut cycle, the dollar will eventually weaken, making it difficult for the yen to depreciate long-term. They expect the yen to appreciate to 155 in the first quarter of next year.

Technical Breakthroughs Could Open New Opportunities

On the technical side, USD/JPY has broken above the 21-day moving average, and MACD signals a buy. If it can break through the 158 resistance, there could be room to rise to 160 or even higher. Conversely, if it faces resistance below 158, a correction back to 154 is more likely.

AUD Under Pressure, Caution Needed for AUD/CNY Outlook

The Australian Dollar declined 0.65 over the week, performing worse than the euro but better than the yen. The downward pressure on AUD/CNY also exists. As a risk-sensitive asset indicator, AUD movements often reflect global economic optimism. The current weakness suggests market caution about global growth prospects, and the medium-term trend of AUD/CNY warrants ongoing attention.

Key Trading Points This Week

• US Q3 GDP data is the biggest focus recently; an upside surprise could boost the dollar
• Watch for speeches by the Bank of Japan Governor and verbal signals from Japanese authorities
• Geopolitical developments could trigger rapid responses in the currency markets
• Investors in AUD/CNY should remain alert to risks of re-pricing in risk assets