Forex
Analysis – Politics, Fed seen swaying Japan’s yen intervention thinking
© Reuters. FILE PHOTO: Coins and banknotes of Japanese yen are seen in this illustration picture taken June 16, 2022. REUTERS/Florence Lo/Illustration
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.”
Investing.com – The U.S. dollar edged higher Thursday, bouncing off its over one-year low after the Federal Reserve announced an outsized interest rate cut, while sterling gained ahead of the Bank of England’s latest policy-setting meeting.
At 04:25 ET (08:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 100.410, having fallen to a more than 12-month low in the previous session.
Large Fed cut confirmed
The started its latest rate-cutting cycle on Wednesday, trimming interest rates for the first time since March 2020 by a hefty 50 basis points to a range of 4.75% to 5%.
Fed Chair Jerome Powell said that risks between higher inflation and more labor market weakness were now evenly balanced, and that the central bank was likely to cut rates further amid growing confidence that inflation will fall.
But Powell also said that the bank had no intention of returning to an ultra-low rate regime as seen during the pandemic, and that the Fed’s neutral rate will now be much higher than seen in the past.
“Where does the Fed’s decision leave the dollar,” analysts at ING ask, in a note. “In our view, still in a softer position compared to most developed market peers. Powell tried to mitigate the dovishness of the outsized rate cut, but that it would be hard to fight the perception that it was the dovish market pricing that pushed the Fed over the line for the 50bp move. If the Fed is perceived as unwilling to disappoint market expectations, investors may continue to prefer erring on the dovish side.”
Attention turns to the release of the weekly data, for the latest clues over the health of the important labor market.
Sterling in demand ahead of BoE meeting
In Europe, rose 0.3% to 1.3253, after climbing to 1.3298 in the previous session, its strongest level since March 2022.
The meets later in the session, and is expected to hold its key interest rate at 5%, after kicking off its easing with a 25-bp reduction in August.
“The inflation picture simply hasn’t improved enough to warrant more easing just yet,” said ING.
UK came in at 2.2% on an annual basis last month, close to the bank’s medium-term target, but services inflation is running hot at an annual 5.6%.
traded 0.3% higher to 1.1149, not far from the three-week high hit in the previous session.
The cut rates for the second time this year last week, but a degree of uncertainty exists over when the next move will be.
Eurozone inflation is still not as low as the ECB would like, Bundesbank President Joachim Nagel said on Wednesday, so interest rates need to remain sufficiently high to resolve price pressures.
While inflation fell to 2.2% in August and may fall even closer to the ECB’s 2% target this month, it will likely rise again towards the end of the year and could end 2024 around 2.5%.
Yen retreats ahead of BOJ meeting
rose 0.3% to 142.75 as traders also positioned for no changes to local interest rates after a meeting on Friday.
The central bank is widely expected to keep rates unchanged, but could still signal future rate hikes on an elevated outlook for inflation.
Japanese is also due on Friday.
traded 0.2% lower to 7.0698, ahead of a decision by the People’s Bank of China on Friday. The central bank is expected to leave this key rate unchanged.
By Sameer Manekar
(Reuters) – Analysts remained bullish on most Asian currencies despite marginally dialling back some bets, a Reuters poll showed on Thursday, as a defensive U.S. dollar driven by a dovish Federal Reserve enhanced the appeal of risk-sensitive assets.
Long bets were the highest on the Malaysian ringgit and the Thai baht, with those on the latter at their peak since January 2023, driven by strong growth fundamentals and stabilising politics.
Responses to the fortnightly poll of 10 economists and analysts were received before the U.S. Federal Reserve’s half-point rate cut and Bank Indonesia’s surprise quarter-point rate cut on Wednesday.
Anticipation of Fed rate cuts pushed the dollar to the defensive, providing a much-needed breathing space for emerging markets and improving their allure. Most Asian currencies logged a stellar recovery in August against the dollar.
“We do not rule out further bouts of USD weakness in the weeks ahead and expect overall downward pressure on USD/Asia FX to be sustained,” analysts at Barclays said.
The is trending near 100 against a basket of major currencies, down from 104 at the end of July.
The analysts said they expect Asian currencies to continue to appreciating in the fourth quarter, but foresee a reversal in the first half of 2025.
Ryota Abe, an economist at Sumitomo Mitsui (NYSE:) Banking Corp, said the market view of Fed rate cuts by the year-end “looks excessive” which could lead to correction in Asian emerging market currencies.
Bullish bets on the Chinese yuan and Singapore dollar were dialled back to levels seen four weeks ago, while those on the Philippine peso hit a four-year peak.
Analysts were long on the Indonesian rupiah for the fourth consecutive iteration of the poll – the longest since May 2023 – underlining the recent appreciation stemming from robust economic fundamentals and growing inflows into emerging markets.
The rupiah has appreciated more than 6% since July and is expected to continue marching on after Bank Indonesia’s (BI) surprise rate cut decision to support growth, front-running the Fed.
Barclays analysts said BI will “likely broadly match or slightly under-deliver versus the Fed in terms of the magnitude of total cuts” which should not “necessarily see the IDR fall out of markets’ favour from a rates-differentials perspective”.
The Indian rupee continued to remain out of analysts’ favour, although short positions were halved since early August as the currency staged a recovery following a sell-off driven by the unwinding of yen carry trades.
The Asian currency positioning poll is focused on what analysts and fund managers believe are the current market positions in nine Asian emerging market currencies: the Chinese yuan, South Korean won, Singapore dollar, Indonesian rupiah, Taiwan dollar, Indian rupee, Philippine peso, Malaysian ringgit and the Thai baht.
The poll uses estimates of net long or short positions on a scale of minus 3 to plus 3. A score of plus 3 indicates the market is significantly long U.S. dollars.
The figures include positions held through non-deliverable forwards (NDFs).
The survey findings are provided below (positions in U.S. dollar versus each currency):
DATE
19-Sep-24 -0.67 -0.9 -1.12 -1.18 -0.66 0.33 -1.3 -1.1 -1.33
05-Sep-24 -0.85 -1.09 -1.26 -1.05 -0.77 0.21 -1.46 -1.00 -1.22
22-Aug-24 -0.62 -0.93 -1.08 -1.26 -0.70 0.21 -1.57 -1.03 -1.16
08-Aug-24 -0.02 0.05 -0.61 -0.02 0.59 0.60 -0.78 -0.29 -0.57
25-Jul-24 1.07 0.79 -0.33 0.35 0.86 0.12 0.39 0.43 0.02
11-Jul-24 1.05 0.87 0.06 0.73 0.68 0.22 1.03 0.86 0.51
27-Jun-24 1.34 1.28 0.80 1.49 0.88 0.46 1.00 1.37 0.91
13-Jun-24 0.95 0.87 0.62 1.22 0.64 0.37 1.00 1.23 0.92
30-May-24 1.05 0.72 0.33 0.94 0.53 0 0.81 1.19 1.00
16-May-24 1.05 0.96 0.35 0.96 1.02 0.39 1.23 1.29 1.00
Investing.com– Most Asian currencies moved in a flat-to-low range on Thursday as the dollar firmed sharply after an outsized interest rate cut by the Federal Reserve was offset by less dovish signals on future rates.
The Japanese yen was among the worst performers for the day, retreating amid pressure from the dollar and as traders priced in no changes to interest rates by the Bank of Japan later this week.
Broader Asian currencies were muted tracking mixed signals from the Fed.
Dollar rises past 50 bps rate cut, Fed outlook less dovish
The and both rose about 0.4% in Asian trade, extending overnight gains.
Strength in the greenback came even as the Fed – the higher end of market expectations- to a range of 4.75% to 5%.
Fed Chair Jerome Powell said that risks between higher inflation and more labor market weakness were now evenly balanced, and that the central bank was likely to cut rates further amid growing confidence that inflation will fall.
But Powell also said that the bank had no intention of returning to an ultra-low rate regime as seen during the pandemic, and that the Fed’s neutral rate will now be much higher than seen in the past.
While traders were still pricing in at least 125 bps worth of cuts by end-2024, Powell’s comments spurred expectations that rates will be higher than initially expected in the medium and long term.
This notion pressured most Asian currencies.
Japanese yen weakens with BOJ on tap
The Japanese yen’s pair rose 0.6% to 143.12 yen and was among the worst performers in Asia.
The currency was pressured by strength in the dollar, while traders also positioned for no changes to local interest rates after a on Friday.
The central bank is widely expected to keep rates unchanged, but could still signal future rate hikes on an elevated outlook for inflation. Japanese is also due on Friday.
Broader Asian currencies were mostly mixed. The Australian dollar’s pair rose 0.4%, buoyed by a stronger-than-expected reading on the in August.
Strength in the labor market gives the Reserve Bank of Australia more headroom to keep rates high for longer, which it is more inclined to do amid signs of sticky inflation in the country.
The Chinese yuan’s pair reversed early gains to trade sideways, with focus squarely on a l decision by the People’s Bank on Friday. The central bank is expected to leave the LPR unchanged.
The South Korean won’s pair jumped 1% as local trade resumed after three days of holidays. The country’s shrank slightly in August.
The Indian rupee’s pair was flat, but moved further away from the 84 rupee level. The Singapore dollar’s pair was flat.
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