The Yen rose to a seven-month high on Monday as traders appeared to rethink their outlook for the long-beleaguered currency, amid growing expectations of faster monetary tightening by the Bank of Japan and the possibility of Japanese investors repatriating funds.
The week’s key scheduled event is Friday’s US inflation report, which is expected to provide further clues about the Federal Reserve’s stance on a potential interest rate hike later this month and, consequently, the direction of the Dollar.
Meanwhile, the European Central Bank is due to meet on Thursday and is widely expected to raise interest rates in the eurozone.
Until then, however, the Yen remains firmly in focus. The Dollar fell 1.14% against the Japanese currency on Monday to 154.42, its lowest level since February. It also broke below the lows recorded in August, when Washington and Tokyo jointly intervened in the currency market to support the Yen, which was trading at 40-year lows at the time.
Much of the Yen’s gains following that intervention quickly faded. Yet renewed support from capital repatriation, the unwinding of carry trades and political pressure from the United States is now prompting short-sellers to reconsider their longer-term bets against the currency.
The 155 level has historically acted as a floor for Dollar-Yen this year, with the Japanese currency tending to find support there following periods of intervention. A break below that level would be a bullish signal for the Yen and could pave the way for further gains.
The Yen’s recent moves have been striking, with the Dollar trading above 160 Yen as recently as last Tuesday.
The market could be approaching a turning point. For some time, the Yen was seen as a one-way bet, with traders expecting the currency to continue weakening. However, there are now early signs that the Bank of Japan’s faster pace of rate hikes is beginning to change that dynamic.
The Euro also weakened against the Yen, falling 1% to 179.5.
The Dollar’s decline against the Japanese currency also weighed slightly more broadly on the greenback. The Euro edged 0.1% higher to $1.1621, while Sterling gained a similar amount to reach $1.3534.
Markets are now pricing in roughly a 57% probability that the Federal Reserve will raise interest rates this month, following Friday’s stronger-than-expected nonfarm payrolls report. Attention has shifted to this week’s inflation data, which could prove crucial in determining the Fed’s next move.
A hotter-than-expected CPI reading would likely cement expectations of a September rate hike and provide further support for the US Dollar. By contrast, a softer inflation figure would strengthen the case for the Federal Reserve to hold rates steady, potentially leaving the Dollar exposed to a dovish repricing, Reuters reports.
Markets are pricing in a 75% probability that the Bank of Japan will raise interest rates by 25 basis points at its 18th September meeting, with a 60% chance of another hike by December.
The Yen gained more than 2% last week, driven by a combination of factors including the unwinding of carry trades and growing expectations of capital repatriation, which could provide further support for the currency.