Japanese Yen trims gains with Fed and BoJ decisions looming
- USD/JPY picks up above the 154.50 area from 152.90 lows but remains below a previous support near 155.20.
- The US Dollar is drawing support from rising bets on Fed rate hikes in the coming months.
- Hawkish BoJ rhetoric and US Dollar debasement trade hit the pair in previous weeks.
The Japanese Yen (JPY) holds moderate losses against the US Dollar (USD) on Monday, but remains close to seven-month highs, following a 4% rally in the previous two weeks. The USD/JPY pair trades just above 153.50 at the time of writing, after bouncing from last week’s lows at 152.90, yet still below the bottom of a previous support area, around 155.20.
The US Dollar gained momentum on Friday after the US Consumer Price Index (CPI) report confirmed that inflation remains sticky, well above the Federal Reserve's (Fed) target rate, and that core inflation rose at its fastest pace in the last four months in August. These figures have boosted expectations that the US central bank will hike interest rates on Wednesday and maybe once more before year-end.
Dollar seen gaining modest support as Fed hike bolsters credibility
Analysts at ING argue that “the dollar would welcome a hike in that it would back up the Fed’s monetary policy credibility and take a little more steam out of the debasement trade,” a theme that had “evolved last year both from doubts over Fed independence and more recently from US Treasury intervention.”
ING adds that “some modestly higher rates at the very short-end of the US curve won’t hurt the dollar either,” suggesting that a firmer policy rate profile should help underpin the currency at the margin.
Yen dips, on the other hand, are likely to remain limited, as investors brace for a hawkish hike by the Bank of Japan (BoJ) on Friday. Strategists at OCBC highlight that markets are “largely positioned for a 25bp hike later this week,” which has flipped speculative positioning net long JPY for the first time since February.
Against this backdrop, OCBC adds that “further downside in USD/JPY may require the BoJ to sound sufficiently hawkish on the path ahead, flows to return and for the broader USD, UST yields to turn lower,” suggesting that additional JPY strength will hinge not only on the policy move itself but also on the tone of the guidance and the trajectory of US rates and the Dollar.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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