Japanese Yen: BoJ policy story having little effect – ING

ING’s Chris Turner notes that despite sharp moves in Japanese money markets, the Japanese Yen is not finding lasting support. Markets now price a high probability of a Bank of Japan hike in September, narrowing US–Japan swap differentials, yet USD/JPY remains elevated as carry trades persist. He sees rising risks for Yen funding and expects USD/JPY could fall below 158 if Fed rates stay unchanged.

BoJ tightening odds and carry risks

"Despite some sharp moves in Japanese money markets this week, the yen is failing to find any lasting support. Here, the big story is that the Japanese government might be more tolerant of a faster tightening cycle by the Bank of Japan."

"Markets now price close to a 75% chance that the BoJ hikes 25bp in September. That has seen two-year US:Japan swap differentials narrow nearly 40bp since mid-July."

"That should be weighing on USD/JPY. The fact that it is not may owe to benign conditions that continue to favour the yen-funded carry trade."

"That said, the risks to funding in yen are squarely increasing, and if we are right with our call for unchanged Fed rates in September, USD/JPY could well be trading back below 158."

"And to play independent yen strength in the interim, expect a lot more focus on short CHF/JPY positions."

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