FOMC could test Tokyo’s JPY weakness appetite – MUFG

The Japanese Yen (JPY) clearly underperformed on the back of the BoJ announcement. Economists at MUFG Bank analyze USD/JPY outlook ahead of the FOMC meeting.

FOMC communication will be key for JPY

The primary risk as we see it is that the FOMC drops a dot from its median dot profile of moves in the fed funds this year from three rate cuts to just two. That action alone would most likely lift yields and help support the Dollar. Still, the OIS market is not hugely out of kilter with that scenario at 20 bps of more cuts. So a bigger move for yields and the Dollar would likely come from not the change in the dots profile from three cuts to two but the communications from Fed Chair Powell that accompanies such a change.

We expect a reasonably balanced Fed communication, no matter what the median dots profile indicates for this year and that should help curtail further USD buying and weaken the current positive momentum (certainly the case of course if the dots profile is unchanged).

If we are incorrect on that, then FX could get interesting as a hawkish communication could see Tokyo’s resolve over limiting Yen depreciation being tested. A Tokyo holiday could exacerbate a move higher and a breach of the 2023 high is certainly feasible. A break of that high could well be accepted in Tokyo but we would still assume intervention would happen quite soon after that, especially with the BoJ’s action this week at least now consistent with Yen buying intervention.