The USDJPY seems to have finally settled down, but it faces a potential major risk event this week. BOJ Governor Kazuo Ueda is expected to give a highly anticipated speech at the annual National Securities Convention on Tuesday. Markets will closely follow his comments. They will look for indications of whether the BOJ will follow up with another rate hike this year.
Last month, the BOJ made an aggressive move to raise rates to a 31-year high. Markets expect further BOJ rate hikes alongside those from other major central banks. Futures are pricing in a 60% chance of a rate hike by the end of the year. This would be the first of three predicted over the rest of the year.
Looking for a Policy Signal
However, the timing of the rate hike could be crucial. Other central banks also look set to hike around the same time. If Ueda convinces the market that a rate hike is coming sooner, it could strengthen the yen and push the USDJPY lower. On the other hand, he might fail to deliver his usual rhetoric, or the market might remain unconvinced. The odds of a rate hike could then slip, and the yen could fall with them.
The USDJPY has generally trended sideways, suggesting the market is looking for a signal to establish a new trend. Central bank policy could be pivotal here, given the relative uncertainty about the rate outlook. The markets see just a 24% chance of a hike at the October meeting. However, they haven’t entirely ruled it out. This means there is both upside and downside for the yen. It depends on whether expectations shift toward an earlier or later hike.
What to Watch For
The main issue is whether the BOJ continues its gradual rate hiking cycle or opts for back-to-back hikes. In other words, will Japan’s central bank keep pace with the Fed and ECB? Both look set to keep hiking aggressively to tame inflation. Or will Japan chart its own, much more dovish path given its unique economic and financial conditions?
As the major central bank with the lowest interest rates, the BOJ is creating something of a floor for global government yields. If Japan’s central bank takes a more aggressive stance, this could have impacts beyond the yen. Rising yields have an effect equivalent to raising rates and effectively tighten monetary policy. Already, ECB President Christine Lagarde suggested that there is less reason to raise rates because rising yields are doing the work. Therefore, if markets view the BOJ as more hawkish, they might see other central banks as comparatively more dovish. This could relatively boost the yen, weighing on those currency pairs.
Temporary Factors Affecting the Yen
Beyond the interest rate situation, analysts have noted a transitory breakdown in the typical correlation between interest rates and the USDJPY. This partly explains why the pair has remained stable despite fading expectations of an immediate BOJ rate hike. The end of September marks both the turn of the quarter and the start of Japan’s fiscal second half. This leads to increased capital flows.
The market is also hesitant to push the pair significantly higher after the large interventions during the summer. Uncertainty around the year-end global central bank moves also contributes to this hesitation. The more clarity the market gets, for example, from Ueda’s speech, the more likely the market could consolidate in a new direction.
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