JPY: Lots of hope – Commerzbank

Those who still believed that the JPY's rally was due to idiosyncratic factors that only affect the Japanese currency were disabused of that notion by 2:30 p.m. (MEST). Better-than-expected US GDP figures put an end to the flight to safety that had been taking place and reversed the trend. The Japanese Yen (JPY) gave up its day's gains against the US Dollar (USD), while emerging market currencies such as the South African Rand were able to recoup their losses, Commerzbank FX strategist Volkmar Baur notes.

The market now expects the BoJ to raise rates

“The JPY has gained about 5% against the US dollar since July 11, more than the Swiss franc and all other G10 currencies. Much of this is likely due to the Bank of Japan (BoJ), or rather the expectations surrounding the BoJ. It will hold a monetary policy meeting next Wednesday. And in recent weeks, expectations for another rate hike have continued to rise. The market now expects the BoJ to raise rates by another 10 basis points to 0.1-0.2%.”

“That hope may be dashed next week, as this morning's data shows. Inflation in the Tokyo area came in below economists' expectations again in July, with the core rate, as defined by the West, coming in at just 1.1%, the lowest level in about two years. Domestic inflationary pressures have yet to really take hold. The Bank of Japan should take this into account when it meets next week.”

“That is why I continue to think that they will not raise rates next week. At its last meeting, it announced that it would present a plan in July on how it will gradually reduce its gross bond purchases over the coming months. In order to better assess the impact of this move, it makes sense not to raise interest rates at the same time. In that case, the USD/JPY will be more dependent on what the Fed does on Wednesday night.”