Japanese yen extends upside due to the likelihood for further policy tightening by the BoJ.
On Monday, the Japanese yen (JPY) extended its winning streak against the US dollar (USD) for the fifth consecutive session. This trend is reinforced by views that the Bank of Japan (BoJ) will tighten monetary policy further, as well as the unwinding of carry trades, which could provide additional support to the JPY in the near term.
JPY may benefit from safe-haven flows as geopolitical tentions rise.
The safe-haven Yen may gain from Increased geopolitical tensions in the Middle East. According to Reuters, an Israeli attack on Sunday targeted two schools, killing at least 30 people. Furthermore, US Secretary of State Tony Blinken suggested that Iran and Hezbollah could launch an attack on Israel as early as Monday, according to three sources briefed on the call, stated Axios.
Recent US labor figures raised the chance of a 50-basis-point Fed rate drop to 74.5% in September.
The US dollar is under pressure following Friday’s poor job market data, which increased predictions of a US Federal Reserve interest rate drop in September. The CME’s FedWatch Tool currently predicts a 74.5% chance of a 50-basis-point rate drop on September 18, up from 11.5% the week before.
Daily Market Movers: Japanese Yen strengthens as chances of Fed rate cuts rise.
The Minutes from At the Bank of Japan’s June meeting, some members expressed concern about growing import prices due to the JPY’s recent drop, which could offer an upside risk to inflation. One member suggested that cost-push inflation could exacerbate underlying inflation if it leads to higher inflation expectations and wage growth.
In July, US nonfarm payrolls (NFP) increased by 114K from the previous month’s 179K (down from 206K). According to figures released on Friday, this total was lower than expected at 175,000. Meanwhile, the US unemployment rate increased to its highest level since November 2021, reaching 4.3% in July from 4.1% in June.
On Thursday, the Bank of Japan (BoJ) released the complete version of its quarterly outlook report, saying Wages and inflation may exceed forecasts. This may be accompanied by growing inflation expectations and a tight labor market.
Yoshimasa Hayashi, Japan’s Chief Cabinet Secretary, said on Thursday that currencies must move smoothly.
Yoshimasa Hayashi, Japan’s Chief Cabinet Secretary, said on Thursday that currencies must move smoothly and represent their underlying characteristics. Hayashi declined to comment on specific forex levels, but stated that he is actively following foreign exchange fluctuations, according to Reuters.
On Wednesday, Reuters reported that Japan’s Ministry of Finance verified suspicions of market intervention by authorities. In July, Japanese government spent ¥5.53 trillion ($36.8 billion) to stabilize the Yen, which had reached its lowest level in 38 years.
Kazuo Ueda, Governor of the Bank of Japan, believes it is appropriate to alter the degree of easing in order to attain the 2% inflation objective in a sustainable and stable manner. Additionally, He reiterated that they will continue to raise interest rates. Moreover, Japan’s largest lender Mitsubishi UFJ Bank announced that it will boost its short-term prime lending rate to 1.625% from 1.475% beginning September 2, in line with the BoJ’s rate hike, according to Reuters.
In assessing the BoJ’s policy outlook moving forward, “the BoJ’s policy statement includes a fairly optimistic assessment of the Japanese economic outlook stating that fixed investment is ‘on a moderate increasing trend’ and corporate profits are ‘improving’,” said Rabobank analysts, adding that wage increases ‘have been spreading across regions, industries, and firm sizes.’ This leaves the door open for additional rate increases, possibly in late 2024 or early 2025.”
