The Japanese Yen Strengthens on Bank of Japan’s Potential Rate Hike
On Tuesday, the Japanese yen gained ground following reports that the Bank of Japan is contemplating raising interest rates to 0.25% after its two-day meeting concludes on Wednesday. This potential increase from the current 0-0.1% has caught the market by surprise, with a 10 basis-point hike seen as only a 55% probability.
The Bank of Japan is also expected to outline plans to taper its massive bond buying program as it gradually unwinds a decade of aggressive monetary stimulus.
Shaun Osborne, chief foreign exchange strategist at Scotiabank, noted, “We’ve seen quite a move in the yen today. Some were expecting this move to have already played out, but there is still potential for further unwinding of carry trades and positioning.”
The dollar weakened by 0.47% against the yen, currently trading at 153.29 yen. It has retreated from a 38-year high of 161.96 reached on July 3.
Osborne believes that the yen’s fair value against the dollar is around 145, suggesting that there is room for the short yen trade to continue unwinding and potentially reverse.
With the dollar losing around 4.7% against the yen this month, investors have been closing positions ahead of the interest rate decision on Wednesday.
Brad Bechtel, global head of FX at Jefferies, expects further yen gains to be temporary, as the wide interest rate differential between the U.S. and Japan will continue to weigh on the currency.
The U.S. dollar also dropped by 0.03% against a basket of currencies to 104.55, after hitting 104.79 earlier in the session, the highest level since July 11.
Looking ahead, the Federal Reserve is anticipated to keep rates unchanged on Wednesday but may offer stronger hints of impending rate cuts. Traders are pricing in a rate cut in September, with the possibility of additional cuts by year-end.
U.S. job openings saw a modest decline in June, while consumer perceptions of the labor market deteriorated. The euro weakened by 0.06% to $1.0812, hitting its lowest level since July 8.
The euro zone’s economy grew slightly more than expected in the second quarter, but concerns remain due to a mixed underlying picture and pessimistic surveys for the rest of the year. Germany’s economy unexpectedly contracted in Q2, and July’s inflation rose.
Sterling also weakened by 0.2% to $1.2833 ahead of the Bank of England’s meeting on Thursday, where the possibility of a rate cut remains uncertain. In the cryptocurrency market, bitcoin fell by 2.64% to $65,586.
Overall, the potential rate hike by the Bank of Japan and the outlook for other major central banks, such as the Fed and the Bank of England, are likely to impact currency markets in the coming months. Traders should closely monitor economic data releases and central bank statements for clues on future monetary policy decisions.