The Japanese yen (USD/JPY) felt the pressure after Wednesday’s Federal Reserve (Fed) meeting, trading at close to 147 yen per dollar. The dollar to yen rate had previously reached a nearly ten-month low of 148.465 earlier in the day.
The decline was driven by the growing divergence in monetary policy between the United States and Japan. While the Fed maintained its target range for the federal funds rate at a 22-year high of 5.25%-5.5% on September 20th, in line with market expectations, it also hinted at the possibility of another rate hike this year.
"This wasn't a 'pause,' it was a 'skip,'" Karl Schamotta, chief market strategist at Corpay in Toronto, told Reuters.
"With the economy performing better than expected and inflation pressures remaining persistent, Fed officials chose to maintain a hawkishly data-contingent bias in this afternoon's statement and dot plot," Schamotta added.
In contrast, the Bank of Japan (BoJ) has consistently maintained its key short-term interest rate at -0.1% since 2006.
Market observers are now anticipating the Bank of Japan's policy decision at the end of the week. However, even if the central bank chooses to move interest rates into positive territory, it is unlikely that the yen will recover its strength in the medium term.
Even as the yen has slipped back toward levels seen at the end of last year, the possibility of the Bank of Japan tightening policy at Friday's meeting remains slim, according to three Reuters sources close to the BoJ. It is also expected that the BoJ will keep its guidance unchanged, affirming its commitment to maintaining its bond yield control policy until inflation consistently reaches the bank's 2% target, as reported by the sources.
"It seems unlikely the BoJ will announce any change of policy tomorrow, or soon for that matter. Although you never know for sure with this central bank," said Matt Simpson, senior market analyst at City Index.
While Hirokazu Matsuno, Japan’s Chief Cabinet Secretary, issued warnings on Thursday that authorities would not rule out any possibilities when it comes to dealing with excessive currency market volatility, Simpson suggested that the risk might be limited to verbal intervention.
"They may not actually intervene if the trend remains orderly," Simpson said.
Financial markets are closely monitoring whether Governor Kazuo Ueda will provide any fresh indications regarding the timing of a potential policy shift during his scheduled news conference following the meeting.
In a recent interview this month, Ueda mentioned that the BoJ might have enough data by the end of the year to make a determination on whether to eliminate negative rates. This has heightened market expectations that the central bank might push short-term rates to zero either later this year or early next year.
As summarised by Markets.com Chief Market Analyst Neil Wilson:
“Having shocked markets in July with a tweak to its yield curve control, the Bank of Japan is not expected to change policy this time; but there will be plenty of focus on the communication and forward guidance after governor Ueda indicated recently that normalisation might be around the corner. Speaking to a Japanese paper, he said the BoJ could start to act once the 2% inflation target is close, which could mean hiking next year. Elsewhere traders should look out for the round of flash manufacturing and services PMIs from the Eurozone, UK and US.”
ING’s Global Head of Markets, Chris Turner, wrote that the dollar to yen rate would be “on the front line” of the dollar’s increasing strength, with the BoJ likely to intervene around the 150 mark:
“This hawkish hold may well keep the dollar bid into October and it will have to be softer US activity data – particularly a rise in jobless claims or a decline in consumer confidence and retail sales – which will be required to soften up the dollar. Dollar bears will get no joy from the Fed.
With US yields firm and US rate volatility sinking again, USD/JPY will be on the front line of this period of dollar strength. Expect to hear more verbal intervention from Tokyo and we suspect the trigger will be pulled on the approach to 150. Expect DXY to grind up to 106.”
In their latest FX Snapshot on September 18, analysts at Citibank Hong Kong said:
“Citi Analysts think USDJPY is stuck between a bullish and bearish impulse. On the bullish side, US cut pricing unwinding amid ongoing cyclical data momentum should support US yields and, by extension, USDJPY.
On the bearish side, hawkish BoJ pushback and risk of MoF intervention may keep USDJPY upside capped. Longer term, they see UST yields retracing below 4% by the end of the year, suggesting USDJPY may move closer to 130, assuming the Fed is finished hiking.”
Citi’s 3-month Japanese yen forecast placed the USD/JPY exchange rate at a potential average of 148, which could improve to 130 in 6 to 12 months’ time, according to the bank. Citi’s long-term JPY forecast was similarly bullish, projecting the USD/JPY pair to trade at a potential average of 130.
The USD/JPY forecast from Australian bank Westpac, last updated on September 15, saw the pair trading at 144 in December 2023, 142 in March 2024, and 140 in June 2024, indicating a potentially bullish trajectory for the yen.
Risk Warning: this article represents only the author’s views and is for reference only. It does not constitute investment advice or financial guidance, nor does it represent the stance of the Markets.com platform.When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice. Trading cryptocurrency CFDs and spread bets is restricted for all UK retail clients.
The U.S. JOLTs job openings for May stood at 7.769 million, with June’s figure (due 29 July, 1400 GMT) expected to fall to 7.1 million, signalling a cooling labour market under tight Fed policy.
Following the ECB's decision to hold interest rates steady, Goldman Sachs and JPMorgan Chase revised their expectations for future rate cuts, considering the economic resilience and potential developments in EU-US trade relations.
As U.S. stock markets soar to record highs, firms like Goldman Sachs and Citadel are advising clients to buy relatively inexpensive hedges to protect against potential losses due to a confluence of risks.
set cookie
