JPY falls back
The start of July saw the Japanese Yen appreciate from north of 160 Yen to the US Dollar down to a low of circa 140 in mid-September. The backdrop that had allowed the Yen to grind ever weaker appeared to be shifting in July. The prospect of monetary adjustment from decades of negative real interest rates combined with regional stimuli and fragile global risk conditions finally allowed the Yen to gain traction. It is no surprise either that the support the Yen found during these two and a half months coincided with the start of interest rate cuts across developed markets.
The prospect of interest rates cuts in economies such as the UK, USA and Eurozone cannot be said to have faded since mid-September. Terminal rate expectations have been consistently falling across the Eurozone and US in particular. Given that global policy loosening was a major stimulus for JPY demand, the depreciation of approximately 13 Yen to the US Dollar that we have seen since mid-September has caught many off guard. The recovery in USD in late September has supported the USDJPY appreciation. However, the selloff in JPY is separate and more systemic than could be explained away by a resurgent Dollar.
The conclusion is investors are once again questioning the monetary outlook for Japan. The latest interest rate decision due this Thursday is unlikely to see the BoJ raise policy rates despite evidence of rising inflationary pressures. Beyond this meeting the chance for a December policy rate adjustment still lies in the balance. The BoJ continues to be seen to be biding its time to observe data and economic conditions before normalising policy rates. As markets continue to adjust pricing in favour of a Trump Presidency come 2025, JPY is unlikely to be able to recover the ground it has ceded in major crosses.
Discussion and Analysis by Charles Porter
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