Forex

Will Fed rate cuts really be negative for USD/JPY?

Published

7 days ago

September 14, 2024

Investing.com — The potential impact of U.S. Federal Reserve rate cuts on the pair is a critical issue for investors and currency strategists, particularly as we approach a possible Fed pivot in 2024.

With divergent monetary policies between the Fed and the Bank of Japan (BoJ), market participants are divided on whether Fed rate cuts will lead to a weaker USD/JPY.

As per analysts at BofA, the relationship between Fed rate cuts and USD/JPY is more nuanced, with a variety of structural and macroeconomic factors playing a role.

Contrary to common market expectations, the relationship between Fed rate cuts and a weakening USD/JPY is not a given.

Historically, USD/JPY did not always decline during Fed easing cycles. The key exception was during the 2007–2008 Global Financial Crisis (GFC), when the unwinding of the yen carry trade caused significant yen appreciation.

Outside of the GFC, Fed rate cuts, such as those seen during the 1995–1996 and 2001–2003 cycles, did not lead to a major decline in USD/JPY.

This suggests that the context of the broader economy, particularly in the U.S., plays a crucial role in how USD/JPY reacts to Fed rate moves.

BofA analysts flag a shift in Japan’s capital flows that dampens the likelihood of a sharp JPY appreciation in response to Fed rate cuts.

Japan’s foreign asset holdings have shifted from foreign bonds to foreign direct investment and equities over the past decade.

Unlike bond investments, which are highly sensitive to interest rate differentials and the carry trade environment, FDI and equity investments are driven more by long-term growth prospects.

As a result, even if U.S. interest rates decline, Japanese investors are unlikely to repatriate funds en masse, limiting upward pressure on the yen.

Moreover, Japan’s demographic challenges have contributed to persistent outward FDI, which has proven to be largely insensitive to U.S. interest rates or exchange rates.

This ongoing capital outflow is structurally bearish for the yen. Retail investors in Japan have also increased their foreign equity exposure through investment trusts (Toshins), and this trend is supported by the expanded Nippon Individual Savings Account (NISA) scheme, which encourages long-term investment rather than short-term speculative flows.

“Without a hard landing in the US economy, Fed rate cuts may not be fundamentally positive for JPY,” the analysts said.

The risk of a prolonged balance sheet recession in the U.S. remains limited, with the U.S. economy expected to achieve a soft landing.

In such a scenario, the USD/JPY is likely to remain elevated, especially as Fed rate cuts would likely be gradual and moderate, based on current forecasts.

The expectation of three 25-basis-point cuts by the end of 2024, rather than the 100+ basis points priced in by the market, further supports the view that USD/JPY could remain strong despite easing U.S. monetary policy.

Japanese life insurers (lifers), who have historically been major participants in foreign bond markets, are another key factor to consider.

While the high cost of hedging and a bearish yen outlook have led lifers to reduce their hedging ratios, this trend limits the potential for a JPY rally in the event of Fed rate cuts.

Furthermore, lifers have scaled back their exposure to foreign bonds, with public pension funds driving much of Japan’s outward bond investment.

These pension funds are less likely to react to short-term market fluctuations, further reducing the likelihood of a yen appreciation.

While BofA remains constructive on USD/JPY, certain risks could alter the trajectory. A recession in the U.S. would likely lead to a more aggressive series of Fed rate cuts, potentially pushing USD/JPY down to 135 or lower.

However, this would require a significant deterioration in U.S. economic data, which is not the base case for most analysts. Conversely, if the U.S. economy reaccelerates and inflation pressures persist, USD/JPY could rise further, potentially retesting 160 in 2025.

The risk from BoJ policy changes is considered less significant. Although the BoJ is gradually normalizing its ultra-loose monetary policy, Japan’s neutral rate remains well below that of the U.S., meaning Fed policy is likely to exert a greater influence on USD/JPY than BoJ moves.

Additionally, the Japanese economy is more sensitive to changes in the U.S. economy than the reverse, which reinforces the notion that Fed policy will be the dominant driver of USD/JPY.

Forex

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

Published

17 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

17 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

17 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