Forex

Analysis – Politics, Fed seen swaying Japan’s yen intervention thinking

Published

1 year ago

August 23, 2023

Analysis - Politics, Fed seen swaying Japan's yen intervention thinking

By Leika Kihara and Tetsushi Kajimoto

TOKYO (Reuters) – The Federal Reserve’s Jackson Hole symposium this week looms as a key risk for Japanese authorities worried that new hawkish signals from U.S. central bankers could trigger another sharp yen selloff that would force Tokyo to prop up the currency.

The annual gathering of Fed officials and other global policymakers has historically been an opportunity for central bankers to regroup and flag their next big steps to markets.

Until recently, investors had expected Fed Chair Jerome Powell might be looking to end to interest rate hikes amid signs inflation was moderating.

The worry now for Japanese officials is that he signals the opposite as price pressures linger, which could trigger a repeat of last year’s yen selloff against the dollar, forcing authorities to intervene again.

While the yen’s fortunes are largely a product of dollar movements, the currency’s weakness has become politically problematic not only for Prime Minister Fumio Kishida but also the Bank of Japan, whose ultra-loose monetary settings have been blamed for inflating import costs.

“Authorities aren’t worried about the weak yen as much as they were around September and October last year,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.

“But the chance of intervention will heighten if a worsening economy hurts the administration’s approval ratings.”

Money markets expect the Fed to maintain rates in the current 5.25%-5.5% range until the second quarter next year before starting to ease. But investors will be looking for clues about possible additional rate hikes from Powell’s speech on Friday.

BOJ Governor Kazuo Ueda is scheduled to attend the Jackson Hole meeting, which has thrown Japan curve balls in the past.

In 2010, former Fed Chair Ben Bernanke’s suggestion of deploying quantitative easing triggered a yen spike that forced then BOJ head Masaaki Shirakawa to cut short his stay at the retreat, and call an emergency meeting in Tokyo to ease monetary policy.

This time around, concerns centre on yen weakness.

To be sure, Japan has not been as worried by recent bouts of yen selling, issuing fewer verbal warnings even as the dollar breached the 145 mark that triggered intervention last year.

With the pace of yen declines moderate and a revival of inbound tourism turning the public’s attention to the benefits of a weak currency, authorities see the threshold for yen-buying currency intervention fairly high compared with last year.

But the more passive approach could change if hawkish comments by Powell drive up the dollar/yen at a faster speed, say three government officials with direct knowledge on Japan’s currency policy.

“Japan likely won’t intervene as long as the moves are gradual,” one of the officials said. “It’s really about cracking down on speed limit violations.”

The yen lost about 1.5% against the dollar this month, much slower than a 4.8% dive seen in the three weeks to Oct. 21 last year when the dollar hit a 32-year high above 150 yen.

POLITICS OF 150

While authorities say that speed – rather than levels – is key in deciding when to step in, a breach of the 150 yen threshold could heighten political pressure on Prime Minister Kishida to act, the officials say.

With his approval ratings sliding, Kishida on Tuesday unveiled a plan to cushion the blow from rising fuel costs driven in part by the weak yen.

“When to intervene has always been an extremely political decision in Japan. Nowadays, it’s the prime minister that ultimately makes the call,” said Atsushi Takeuchi, a former BOJ official who was involved in Tokyo’s market foray a decade ago.

“Authorities usually don’t have a specific line-in-the-sand in mind. But key thresholds like 150 are important for political reasons, as they are easy to understand.”

Japan’s dilemma runs deep. Core inflation exceeded the central bank’s 2% target for 16 straight months in July as firms continue to pass on higher import costs driven in part by the weak yen.

Worried about hurting a fragile economy, the BOJ has stressed its resolve to keep interest rates ultra-low even as it decided last month to raise a cap on long-term bond yields.

The BOJ’s dovish tone, coupled with prospects that U.S. interest rates could stay higher for longer, has kept the dollar hovering around a nine-month high of 146.565 yen hit last week.

But while the Fed and worries about China’s economic woes could bring yen moves back into focus, there are doubts intervention would actually achieve much.

“Authorities could smooth the pace of currency moves,” said Daisaku Ueno, chief currency strategist at Mitsubishi UFJ (NYSE:) Morgan Stanley Securities. “But they can’t affect levels or trend, which depends largely on U.S. monetary policy.”

Forex

Asia FX rises as rate cut dents dollar; yen firms as BOJ holds course

Published

2 hours ago

September 20, 2024

Investing.com– Most Asian currencies firmed on Friday, while the dollar nursed losses after the Federal Reserve cut rates by a wide margin and kicked off an easing cycle.

The Japanese yen was among the better performers, strengthening after the Bank of Japan held interest rates and said it expected steady increases in inflation and economic growth.

The Chinese yuan also firmed after the People’s Bank of China kept its benchmark rates unchanged, ducking some expectations that it would cut rates to further support the economy.

Yen firm as BOJ holds rates, flags higher inflation

The Japanese yen firmed on Friday, with the pair falling 0.2% to 142.28 yen.

The BOJ in a unanimous decision, and said it expected inflation and economic growth to steadily increase.

While the central bank did not provide any overtly hawkish cues, its forecast of higher inflation tied into expectations that the BOJ will raise interest rates further. A slew of policymakers had signaled that rates will rise further in the coming months, especially as inflation picks up.

The BOJ decision and forecast came just hours after data showed inflation rose to a 10-month high in August, as increased wages pushed up private consumption.

While the yen was nursing weekly losses, it still remained close to its strongest levels for 2024, hit earlier in the week. Expectations of higher interest rates are likely to underpin the yen in the coming months.

Dollar weak after rate cut cheer offsets less dovish Fed signals

The and both fell slightly in Asian trade, extending overnight declines as markets looked to lower U.S. interest rates.

The Fed and announced the start of an easing cycle, which could see rates fall by as much as 125 bps by the year-end.

But Fed Chair Powell offered a less dovish outlook for medium-to-long term rates, stating that the central bank’s neutral rate will be much higher than seen in the past. His comments limited overall losses in the dollar, and had also seen the greenback appreciate in the immediate aftermath of the Fed decision on Wednesday.

Chinese yuan at 16-mth high as PBOC holds rates

The Chinese yuan firmed on Friday, with the pair falling 0.3% to its lowest level since May 2023.

Strength in the yuan came as the PBOC kept its benchmark steady, ducking some expectations that it would cut rates further to stimulate the economy.

The PBOC’s decision came even as a raft of recent economic indicators showed sustained weakness in China.

But media reports said the PBOC was instructing local banks to buy dollars and limit overall strength in the yuan, given that a stronger yuan also weighs on Chinese exports.

Broader Asian currencies firmed after the Fed’s decision. The Australian dollar’s pair rose 0.2% and was close to an eight-month high.

The South Korean won’s pair was an outlier, rising 0.2%, while the Singapore dollar’s pair fell 0.1%.

The Indian rupee’s pair fell 0.1%, pulling back further from record highs hit earlier this year.

Forex

Stay long on the yen amid rate hikes, improving growth- BCA

Published

2 hours ago

September 20, 2024

Investing.com– BCA Research said bets on a stronger Japanese yen were becoming more entrenched amid attractive valuations in local assets, the prospect of more interest rate hikes and an improving Japanese economy.

The yen saw a stellar recovery over the past two months, as a hawkish Bank of Japan, a weaker dollar and an unwinding carry trade pushed the currency to 2024 peaks. The pair had fallen as low as 139 yen in recent weeks.

BCA Research said in a recent note that the yen was a “high-conviction” buy, and that interest rates and global economic conditions were likely to favor the currency in the coming months.

BCA expects the BOJ to this week. But a “dovish hold” is an opportunity to accumulate more yen, while an unexpected rate hike is set to further boost the currency.

The research firm said the Japanese economy remained resilient, with increases in local wages helping spruce up private consumption.

With the Federal Reserve beginning an easing cycle, and with the BOJ likely to hike interest rates further, BCA sees interest rate differentials still moving in favor of the yen in the long term- more so if the global economy enters a recession.

BCA expects Japanese inflation to rise further in the coming months, tieing into the BOJ’s forecasts and giving the central bank more headroom to raise interest rates. The central bank hiked rates twice so far this year, ending years of easy monetary policy on expectations of an uptick in private consumption and inflation.

While the BOJ is expected to keep rates on hold in the near-term, especially with a looming leadership change in the Japanese government, it is still expected to keep raising rates by end-2024 and going into 2025. BCA said an interest rate hike will “not hurt Japan.”

On Japanese equities, however, BCA was less enthusiastic, rating them as “structurally neutral.” The firm cited yen strength as a headwind, and saw no immediate positive developments in ongoing corporate governance and structural reforms.

Forex

Dollar slips in choppy trading as traders grapple with Fed’s giant rate cut

Published

2 hours ago

September 20, 2024

(Adds missing “cuts” in first bullet, no other changes to text)

By Chibuike Oguh and Stefano Rebaudo

NEW YORK (Reuters) – The U.S. dollar slipped in choppy trading on Wednesday as markets grappled with the supersized 50 basis point interest rate cut, as well as the switch to an easing monetary policy stance delivered by the Federal Reserve.

Investor expectations had largely shifted towards a dovish outcome in the days leading up to the Fed’s move on Wednesday, with money markets pricing in around a 65% chance of a 50 basis point (bp) cut. But economists polled by Reuters were leaning towards a 25 bp cut.

“The interesting thing is the half point cut, which was pretty much unexpected or at least only half and half yesterday, has not really given the dollar extra damage – which is quite surprising,” said Joseph Trevisani, senior analyst at FXStreet in New York.

The , which measures the greenback against a basket of six peers, was down 0.38% to 100.64 after reversing gains made in early trading. It slid to its lowest in more than a year of 100.21 in the previous session.

The euro strengthened 0.4% to $1.1163. Against the yen, the dollar was 0.33% higher at 142.73 as markets anticipate that the Bank of Japan will leave interest rates unchanged on Friday.

The dollar weakened 0.08% to 0.847 against the Swiss franc and dropped 0.34% to 7.070 versus the offshore .

“What it’s really doing I think is giving permission, if you will, for the other central banks around the world, some of whom have started to cut rates already, to go further with their rate cuts,” Trevisani said.

Money markets priced in 72 bps of additional rate cuts in 2024 and 192 bps by September 2025.

The U.S. Treasury yield curve, which measures the gap between yields on two- and and seen as an indicator of economic expectations, steepened and hit its highest since June 2022. It was last at a positive 13.4 basis points, indicating more upcoming rate cuts.

Initial claims for state unemployment benefits dropped unexpectedly to 12,000 last week, according to Labor Department data on Thursday, suggesting labor market growth.

Fed policymakers on Wednesday projected the benchmark interest rate would fall by another half of a percentage point by the end of this year, a full percentage point next year and half of a percentage point in 2026.

“The initial interpretation of the decision was that it was dovish and while it was basically even odds that it was going to happen, overall, on the surface, it’s still a dovish move,” said Eugene Epstein, head of trading & structured products North America at Moneycorp in Boston.

“Everything reversed basically by the end of the day, so you can make the argument as a bit of buy the rumour, sell the fact. A lot of dovishness was already priced in.”

The pound hit its highest since March 2022 versus the dollar after the Bank of England’s Monetary Policy Committee (MPC) voted 8-1 to keep rates on hold. Sterling was up 0.5% against the greenback at $1.3278 after reaching as high as $1.3314.

The Australian and New Zealand dollars drew support from domestic data surprises. Australian employment exceeded forecasts for a third straight month in August.

The was up 0.77% to $0.6815.

The , meanwhile, traded 0.58% higher at $0.6244, after data showed the New Zealand economy contracted by 0.2% in the second quarter.

Currency bid prices at 19

September 07:17 p.m. GMT

Description RIC Last U.S. Close Previous Session Pct Change YTD Pct High Bid Low Bid

Dollar index 100.62 101.02 -0.39% -0.74% 101.47 100.51

Euro/Dollar 1.1162 1.1118 0.4% 1.13% $1.1179 $1.1069

Dollar/Yen 142.61 142.3 0.22% 1.11% 143.875 141.885

Euro/Yen 1.1162 158.18 0.64% 2.29% 159.96 157.79

Dollar/Swiss 0.8469 0.8463 0.06% 0.62% 0.8515 0.845

Sterling/Dollar 1.3276 1.3214 0.51% 4.37% $1.3314 $1.3155

Dollar/Canadian 1.3559 1.3606 -0.34% 2.29% 1.3648 1.3534