By Wayne Cole
SYDNEY (Reuters) – The yen remained under pressure on Friday as investors expected the Bank of Japan to be cautious about further monetary tightening at its policy meeting, while the dollar had problems of its own as markets price in faster U.S. interest rate cuts.
It’s been a tough week for the yen, with the euro rising 2.2 percent to 159.46 as speculators booked profits on recent yen buying positions.
The euro also rose to $1.1160, up 0.8% for the week and on track to hit its August high of $1.1201. A break below this level would target the July 2023 high of $1.1275.
The dollar has risen 1.4% this week to 142.84 yen, down from an overnight high of 143.95 yen, with resistance at 144.20 yen and support at the recent low of 139.58 yen.
The Bank of Japan is widely expected to keep its policy rate unchanged at 0.25% late on Friday and maintain its view that the economy is recovering slowly as wage increases support consumption.
Consumer price index data released on Friday showed core inflation rose to 2.8% in August, while overall inflation reached 3.0%.
Samara Hammoud, currency strategist at CBA, noted that Japan’s real interest rates are still significantly negative at around minus 2.5%, while the Bank of Japan estimates the neutral rate to be in the range of minus 1% to 0.5%.
“Therefore, there is room to raise policy rates further while keeping financial conditions accommodative,” she said. “Our base case is that the BOJ will next hike rates by 25 basis points in October, but risks are tilted towards a rate hike beyond that.”
“The recent turmoil in financial markets and the upcoming LDP general election may make the Bank of Japan more cautious about raising interest rates.”
Investors will be watching to see whether Governor Ueda Kazuo gives any indication of the timing and pace of monetary tightening at his post-meeting press conference, as the Bank of Japan’s policy statements can be quite opaque at times.
Dollar Fall
Many other countries around the world are moving in the opposite direction, with markets expecting the People’s Bank of China to cut its long-term prime rate by 5-10 basis points on Friday.
China has also hinted at other stimulus measures after aggressive monetary easing by the U.S. Federal Reserve pushed the dollar to a 16-month low against the yuan.
Markets are signaling a 40% chance of another 50 basis point Fed cut in November, and are pricing in a 73 basis point cut by the end of the year. Interest rates are expected to hit 2.85% by the end of 2025, which is considered the Fed’s neutral outlook.
This dovish outlook raised hopes for continued U.S. economic growth, sparking a strong rally in risk assets. Currencies linked to global growth and commodity prices also benefited, surging above $0.6800.
It was stuck at 100.69, just above its one-year low.
The pound rose again after the Bank of England kept interest rates on hold on Thursday, with the governor saying “we need to be careful not to cut interest rates too quickly or too much”.
The pound has risen 1.1% to $1.3276 so far this week, its highest level since March 2022.
