The Japanese yen (USD/JPY) jumped on Monday, driven by recent remarks from Bank of Japan (BoJ) Governor Kazuo Ueda, who ignited optimism that the country might soon transition away from negative interest rates. Meanwhile, the dollar (USDX) weakened in anticipation of this week's crucial U.S. inflation report.
The greenback experienced a decline ahead of the forthcoming U.S. inflation figures set to be released on Wednesday. Traders are closely monitoring whether the world's largest economy is heading towards a "soft landing" and whether the U.S. Federal Reserve (Fed) intends to further increase interest rates.
The Japanese currency, on the other hand, strengthened by 0.67% against the dollar, reaching a level of 146.85 per USD. The dollar to yen rate previously surged by over 1% to reach 145.91, marking its highest level since September 1. This boost was attributed to comments made by Ueda over the past weekend, suggesting that the central bank might consider abandoning its negative interest rate policy once it gets closer to achieving its 2% inflation target.
In an interview with the Yomiuri newspaper, Ueda indicated that by the end of the year, the BOJ could have collected enough data to make a determination regarding the discontinuation of negative interest rates.
"It seems that Ueda's comments were intended to stop the yen's slide against the dollar," Takehiko Masuzawa, trading head at Phillip Securities Japan, said in a comment to Reuters. "His comments are working almost the same as government intervention."
The yen has experienced a significant decline in value versus the dollar this year, primarily due to a growing interest rate gap with the United States. The Federal Reserve has aggressively pursued a tightening monetary policy, while the BoJ has continued to adhere to a more dovish stance, causing the dollar to yen rate to rise from 128.00 in early February to the current 146.5, as per Marketwatch.
Meanwhile, economic data has shown that Japan's economy expanded by 4.8% on an annualized basis during the second quarter. This figure was revised downward from the initial estimate of 6% growth and fell short of market forecasts, which had anticipated a 5.5% expansion.
In a comment on Monday, Francesco Pesole, an FX analyst at Dutch bank ING, agreed with Masuzawa’s assessment of Ueda’s comments acting as a form of government support. He noted that the USD/JPY currency pair was overbought and could test the 146.00 level:
The Bank of Japan’s Governor Kazuo Ueda released an interview where he said policymakers may have enough information by year-end – if wage inflation continues – to make a decision on unwinding some monetary stimulus. The market reaction to this has been significant. The overbought USD/JPY is falling and testing 146.00, and the benchmark JGB yields are at 0.70% despite the BoJ deploying the loans-for-bonds programme to curb yields. The timing of Ueda’s interview may suggest an intent to support JPY without deploying intervention – which wouldn’t be warranted by an excessively concerning rate of JPY depreciation anyway.
The bank’s dollar to yen forecast, last updated on August 31, indicated that it sees a further strengthening of the Japanese currency going forward. ING’s USD/JPY forecast for Q4 2023 saw the pair trading at 130.00, and then dropping to a potential average of 125.00 in Q1 2024. ING’s forecast for the remaining three quarters in 2024 indicated a further drop to 120.00.
Pesole added that the USD/JPY projection was highly dependent on U.S. economic data, which could prove supportive for the dollar:
This morning’s change of direction in dollar dynamics has clearly been fueled by moves from the BoJ and [China’s] PBoC, but whether USD/JPY and USD/CNY can stay under pressure relies on the dollar’s reaction to its own domestic drivers. This will be a busy week in US data, and the latest releases have tended to be quite supportive for the greenback.
In his G10 FX Daily overview on September 11, Scotiabank’s Chief FX Strategist Shaun Osborne also stressed the importance of key U.S. data ahead, such as the monthly CPI reading, which will be released this week:
Headline prices are expected to pick up in August (+0.6% M/M and +3.6% Y/Y expected) on higher gasoline but core prices are expected to remain contained, rising 0.2% on the month for the third time on the bounce. That sort of monthly pace is more in line with stable price environments and will give the Fed more confidence that the battle against inflation is being won. Note the WSJ’s Fed watcher Timiraos reports that ‘an important shift’ in the Fed’s rate stance is ‘underway’ and that a pause is ‘likely’ at this month’s meeting. Thursday’s ECB policy decision has looked less threatening for the USD as weak growth data have undercut hike expectations.
Danske Bank’s forex overview, last updated in late August, broadly agreed with ING, and projected a gradual fall in the USD/JPY rate going forward:
The USD/JPY seems fundamentally overvalued and combined with potential monetary policy tightening; we expect the cross to drop to around 130 on a 6-12M horizon. We think the BoJ still is underestimating inflationary pressures in Japan, and the persistence of underlying inflation will continue to build pressure on BoJ’s ultra-dovish stance.
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