Japanese Yen: Further gains favored against US Dollar - BBH

Brown Brothers Harriman’s (BBH) Elias Haddad notes that recent Oil-driven market moves and sticky US Consumer Price Index (CPI) have strengthened expectations for a September Fed hike, but the futures curve already prices nearly 100 bps of tightening over twelve months. With the Fed and Bank of Japan (BoJ) decisions in focus, the bank sees asymmetric risks for the Dollar and skewed upside for the Japanese Yen.

Fed and BoJ shape pair outlook

"The overshoot in Brent crude oil prices above $100 a barrel drove most of last week’s market moves, pushing bond yields higher, weighing on equities, and lending USD modest support. In parallel, sticky US August CPI inflation strengthened the case for a September Fed funds rate hike but failed to justify an aggressive tightening path. USD quickly surrendered its initial gains and finished broadly flat on Friday."

"The Fed and BoJ decision take center stage this week, with risks tilted toward a lower USD/JPY."

"The futures curve already imply almost 100bps of tightening over the next twelve months: 25bps this week, another 25bps hike by year-end, and nearly 50bps by September 2027. This creates an asymmetric risk for USD with limited gains from a hawkish outcome, but greater downside from a dovish surprise."

"Bottom line, risks are skewed towards further JPY gains. A hawkish 25bps hike would extend the rally in JPY, while a surprise 50bps move would supercharge it. The bearish JPY scenario is a narrow majority for a 25bps hike and/or Ueda pushing back against market rate expectations."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)