The Japanese yen continued to rise for the fourth consecutive day on Tuesday, climbing higher against the US dollar. A combination of factors have boosted the yen including interest rate differentials between the Bank of Japan (BoJ) and the Federal Reserve (Fed), as well as expectations that the BoJ will change its monetary policy.
Markets expect Fed rate cuts as early as 2024
Last week, the Japanese yen fell to a one-year low, but it has since then rebounded. The reason behind the yen’s momentum is expectations that Fed policy will be less restrictive in the first half of 2024.
The disappointing US macroeconomic data showed that the jobs market has slowed down and inflationary pressures have eased, which has eliminated any possibility of further rate increases, while it triggered rumours about a series of rate cuts in 2024. According to the CME’s FedWatch tool, there is a 100% chance the Fed will pause its rate hiking cycle in December, while there is a 30% chance of a rate cut in March 2024, and a 64% chance for a rate cut in May. The dovish outlook has pushed the USD Index (DXY) lower, and analysts expect the USD/JPY pair to further weaken.
Investors, however, remain unsure about when the Fed will commence the easing of its monetary policy. Additionally, Fed officials have left the door open for further rate hikes if economic data indicates the bank needs to act aggressively. Richmond Fed President Thomas Barkin said on Monday that inflation could persist and force the central bank to keep interest rates higher for longer. Tomorrow, on Wednesday, when the FOMC minutes will be released, investors will gain further insights into the Fed’s future rate path.
US Treasuries less attractive to investors
The yen has also capitalised on the fact that lower yields have made US Treasuries less attractive to investors. A further decline in the US Treasury bond yields has also led to the narrowing of the US-Japan rate differential. This may continue to lend support to the Japanese yen (JPY) and push the USD/JPY pair lower.
Will the Bank of Japan (BoJ) change its ultra-loose monetary policy?
Market participants are looking closely for any clues the BoJ will change its monetary policy. The central bank has tried to discourage expectations for a shift in monetary policy, but there have been subtle signals that the Japanese central bank plans to exit negative rates in 2024. These speculations that the BoJ may end its negative interest rate policy by early next year have also supported the yen.
Yen’s recent swings raise questions
Japan’s Ministry of Finance threatened to intervene to boost the yen last week after it weakened, but its recent strength has moderated such expectations. However, the recent swings of the yen have raised questions about its latest boost and whether its upswing is sustainable.
FOMC meeting minutes
With uncertainty around the Fed’s potential moves, investors will closely examine the FOMC meeting minutes to get insight into the bank’s intentions and whether it is considering raising interest rates again. This will have an immediate impact on the price dynamics of the greenback and influence the USD/JPY pair.