- Move ramped up as Europe, US traders digested rate decision
- Policymakers raised rates and unveiled plan to cut bond buying
The currency climbed as much as 2.1% against the greenback, punching through the key 150 per dollar level, and adding to a rapid advance that began earlier this month in anticipation of a hawkish decision by the central bank. Japanese government bonds tumbled in the wake of the announcement, with the yield on two-year notes climbing to the highest in 15 years.
The yen has benefited in recent days from a rapid unwind in carry trades, a strategy that uses low yielding currencies like the yen to fund purchases in higher yielders such as the Mexican peso. That capitulation has seen the currency rally more than 7% from a 38-year low versus the dollar reached July 3.
“From the Japan side, the BOJ’s hike to 0.25% is still a small step, but could eventually be seen as the start of a larger trend,” said Yusuke Miyairi, a currency strategist at Nomura International Plc. “If the market expectation becomes more hawkish, then there’s more scope for the yen to strengthen.”
The yen extended its rally to touch 149.64 versus the dollar in New York morning trade after the release of US economic data. The yield on benchmark 10-year bonds rose as much as 8 basis points to 1.083%, while the yield on two-year notes climbed to 0.456%, the highest since 2009. Meanwhile, the Topix stock index closed 1.5% higher, led by a surge in banking shares.
Markets are now turning their focus to the Federal Reserve’s monetary policy decision later on Wednesday to gauge whether the US is moving closer to lowering interest rates — action that would further curtail the rate gap between the nations and support the yen.
“If the Fed’s Powell leans dovish this afternoon in his presser, or if there is a concrete indication in the Fed statement that there will in fact be an interest-rate cut in September, the yen could have more room to run,” said Helen Given, a foreign-exchange trader at Monex Inc. “I see two Fed cuts this year, and then we could pretty easily see yen at 145 by the end of this year.”
JPMorgan Chase & Co. estimated on July 26 that around 40% of carry trades in G-10 currencies have been unwound in recent weeks, and data published Friday showed the biggest retreat of bets against the yen since 2011.
Strategists at Wells Fargo see this reduction in bearish yen positions as a factor limiting the yen’s gains going forward. There “may be better value in buying dollar-yen at or around these levels” as the pair finds its footing around the 150 level, the bank’s Erik Nelson and Jack Boswell wrote Wednesday.
The BOJ raised its policy rate to around 0.25% from a range of 0 to 0.1%, according to its statement Wednesday. It also said it would reduce its monthly pace of bond buying — both actions that underscored its determination to normalize policy.
While only about 30% of central bank watchers had expected a rate hike this week, more than 90% had seen the risk of such a move, according to a Bloomberg survey. Comments from Japan’s new currency chief, who said recent yen weakness had done more harm than good for the Japanese economy, had added to the anticipation.
The initial pace of the BOJ’s cuts to bond buying was a touch slower than some expectations but the plan looks more aggressive than other market forecasts for a halving of purchases over a two-year period.
What Bloomberg Strategists Say…
“The yen has more upside from here, because the short-term drivers of the currency have been provided by what the BOJ delivered, even if its underlying policy choices may turn out flawed. Governor Ueda backed up an interest rate hike with a full-fledged attempt at being hawkish, and that shouldn’t be dismissed lightly.”
—Mark Cudmore, MLIV Executive Editor in Singapore
BOJ Governor Ueda said any additional hikes this year would be data dependent and would be undertaken only after gauging the impact of Wednesday’s move as well as the March rate increase.
Asked if the bank could lift rates beyond 0.5%, Ueda said, “If you’re asking if we view that as a wall, we don’t really have that sense.”
