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12 Sep 2024
USD/JPY appreciates toward 143.00 as traders expect the Fed to deliver a smaller rate cut
- USD/JPY gains ground due to rising odds of a smaller rate cut by the Fed in September.
- BoJ board member Naoki Tamura stated that there is no predetermined plan regarding the pace of future rate hikes.
- CME FedWatch Tool suggests the odds of a 50 bps rate cut by the Fed have decreased to 15.0%.
USD/JPY breaks its two-day losing streak, trading around 142.90 during the European hours on Thursday. The Japanese Yen (JPY) remains subdued following the remarks from the Bank of Japan (BoJ) board member Naoki Tamura.
BoJ board member Tamura stated that there is "no preset idea on the pace of further rate hikes." Unlike in the US and Europe, Japan's rate hikes are expected to proceed more gradually. The exact timing for when short-term rates in Japan might reach 1% will depend on the economic and price conditions at that time.
Read the full article: BoJ’s Tamura doesn't have a preset idea on the pace of further rate hikes
The upside of the USD/JPY pair could be attributed to rising expectations of a smaller interest rate cut by the Fed in September. August’s US Consumer Price Index (CPI) data showed that headline inflation dropped to a three-year low. This development has heightened the likelihood that the Federal Reserve (Fed) will begin its easing cycle with a 25-basis points interest rate cut in September.
The US Consumer Price Index dipped to 2.5% year-on-year in August, from the previous reading of 2.9%. The index has fallen short of the expected 2.6% reading. Meanwhile, headline CPI stood at 0.2% MoM. Core CPI ex Food & Energy, remained unchanged at 3.2% YoY. On a monthly basis, core CPI rose to 0.3% from the previous 0.2% reading.
According to the CME FedWatch Tool, markets are fully anticipating at least a 25 basis point (bps) rate cut by the Federal Reserve at its September meeting. The likelihood of a 50 bps rate cut has sharply decreased to 15.0%, down from 44.0% a week ago.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.
The BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.