Yen squeezed as hawkish turn grips central banks
“The yen was under pressure from a firm dollar on Tuesday as traders wagered on policymakers in Japan struggling to keep up with a hawkish turn by global central banks, leaving the country's interest…”
Moves were contained thanks to a holiday in Japan and because of the risk of intervention, after the Nikkei newspaper reported Japan checked dollar/yen rates on Friday. Such a move is often a precursor to stepping into the market.
After drifting lower on Monday, the yen traded at 157.33 versus the dollar early on Tuesday, while broader financial markets were buoyed by falling oil prices. Other currency pairs were mostly steady, with the euro at $1.1467, though cryptocurrencies have rallied in the past day to lift bitcoin to an eight-month high above $87,000.
Aside from bouncing after the rate check report, the yen has been under pressure since a Bank of Japan interest rate hike on Friday came with two dovish dissents. That contrasted with the Federal Reserve, which also hiked rates last week, and most other global central banks which are sounding hawkish and have markets pricing more increases this year.
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"Unless the BOJ tightens policy more rapidly than the Federal Reserve, the approximately 275-basis-point US-Japan rate differential should continue to support yen-funded carry trades," said Carlos Casanova, senior Asia economist at Union Bancaire Privée, in a note to clients. "We expect dollar/yen to rise to 160 by year-end before appreciating moderately to 156 by mid-2027.
"Markets are pricing about a 30% chance that the BOJ hikes its benchmark short-term rate to 1.5% in October and a roughly 55% chance that the Fed will lift its funds rate window by 25 basis points to 4% to 4.25%.
Reserve Bank of Australia Governor Michele Bullock is likely to strike a hawkish tone at a fireside chat scheduled later on Tuesday with markets pricing a 90% chance of a rate hike next week, the country's fourth this year. The Aussie dollar hovered at $0.7120.
Sterling traded around $1.3372. The New Zealand dollar was pinned near multi-month lows at $0.5708 since kiwi rates, sitting at 2.75%, are much lower than peers. "Kiwi price action looks weak as higher-yielding currencies benefit from better carry," ANZ analysts said in a note.
"Even with markets expecting about five more official cash rate hikes, that still would not take the OCR anywhere near the US federal funds rate or the RBA cash rate, both of which are expected to keep rising. "
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