Yen rallies sharply as markets raise bets on Bank of Japan rate hikes; US dollar drops

[SINGAPORE/LONDON] The yen extended gains on Thursday (Sep 3) after a sudden burst higher in the previous session, though traders stopped short of attributing the move to intervention by Japanese authorities and pointed instead to rising bets on Bank of Japan rate hikes.

The US dollar dropped 1.5 per cent to 156.17 yen, after a 0.9 per cent fall the day before, leaving the Japanese currency at its strongest in a month.

Markets were on alert for any official intervention from Japan, though analysts suggested the move was more orderly than is typically the case when Tokyo steps in.

The Japanese currency’s rally was broad-based, with the euro sliding more than 1 per cent to 181.62.

The renewed yen strength follows hawkish comments from Bank of Japan board member Hajime Takata, who said on Wednesday the central bank should conduct interest rate hikes nimbly to counter intensifying inflationary pressures, rather than adhere to a fixed semiannual pace anticipated by markets.

The “remarks are the strongest messaging we’ve heard from the board and reintroduce the idea of an expedited rate hike trajectory,” Citi said in a client note, adding that the market was taking Takata’s comments “more seriously”.

A Bank of Japan rate hike this month is nearly fully priced in by markets.

Since a rare joint yen-buying intervention between the US and Japan on Jul 31, the yen has struggled to find lasting support, coming under pressure from still-wide interest rate differentials, fiscal worries and a renewed spike in energy prices.

That means all eyes are on further policy changes.

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Chris Turner, global head of markets at ING, said a Federal Reserve rate hike in September – which markets are increasingly pricing in after chair Kevin Warsh’s hawkish speech last week – would likely limit the dollar’s fall against the yen.

“Any sustainable turn lower in USD/JPY now probably requires a much more hawkish Bank of Japan and some new initiatives to encourage domestic investment in Japan,” he said.

In the broader market, the yen strength left the US dollar on the back foot, with the euro up 0.1 per cent to US$1.1602. Sterling inched up from a three-week low and last bought US$1.3493.

The bigger mover in Europe was the Swiss franc, which strengthened after data showed a jump in inflation to 0.8 per cent year-on-year, up from 0.4 per cent in July, raising the possibility that the Swiss National Bank may raise interest rates away from zero.

The dollar fell 0.44 per cent to 0.8092 francs, and the euro shed 0.3 per cent to 0.9385 francs.

Elsewhere, the New Zealand dollar rose 0.3 per cent, having slid 0.7 per cent on Wednesday following a dovish hike from the central bank, while the Canadian dollar extended overnight gains after the Bank of Canada held rates on Wednesday but signalled its readiness to tighten policy to rein in inflation.

The focus now shifts to Friday’s US nonfarm payrolls report, where analysts forecast an increase of 56,000 in jobs, following July’s shock drop of 23,000, with unemployment holding at 4.1 per cent.

A much weaker outcome would probably be needed to greatly lessen the risk of a September rate hike from the Federal Reserve, with markets now pricing in a 61 per cent chance of a move. REUTERS