Japanese Yen: Faster BoJ tightening supports gains against US Dollar - MUFG

MUFG’s Halpenny expects the BoJ to deliver a 25bps hike to 1.25%, with communications outlining further rate increases and supporting efforts to strengthen the Japanese Yen. However, he warns Governor Ueda may sound cautious versus aggressive market pricing for 90bps of hikes. Any disappointment could lift USD/JPY, although recent retracement suggests BoJ tightening is increasingly driving FX direction.

BoJ tightening and Ueda caution risk

"Early tomorrow, ahead of the London open, the BoJ will announce its monetary policy decision with market pricing signalling a near 100% expectations of a 25bp rate hike to 1.25%. We certainly expect the general message from the communications to signal a clear plan to raise rates further which will go some way to endorsing the OIS rate curve priced for further hikes. It would also be consistent with the BoJ aligning itself to the coordinated efforts between Japan and the US to strengthen the yen."

"That said, there is a notable risk that Governor Ueda’s comments could fall short of what markets are expecting given 90bps of hikes are priced over the next 12mths. Governor Ueda has history on being cautious when global uncertainties rise and with rising energy prices comes rising global yields and the risk of a global equity market downturn. He will certainly give little credence to the reports that the BoJ could need to consider a larger 50bp hike, which were triggered by a speech by uber-hawk Hajime Takata on 2nd September."

"The 2-year US-JP swap spread is already signalling upside risks to USD/JPY based on co-movement over the last twelve months. It’s well known that in recent years that spread is not a particularly reliable indicator of FX moves but the co-movement is a lot more resilient since December last year – until the sharp drop in USD/JPY earlier this month. The US-JP 2-yr spread is 30bps higher so any disappointment in Ueda matching market pricing could see USD/JPY bounce more notably higher."

"That said, the retracement in USD/JPY today is notable and suggests from an FX perspective the expected faster pace of BoJ tightening is becoming a more important influence on FX direction."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)