Japanese Yen Eyes Fresh Lows on Bank of Japan Sows Confusion: XM.com

Written by Raffi Boyadjian, Lead Investment Analyst at XM.com, an original version of this article can be found here.

The Japanese yen found itself in the familiar position of eyeing fresh lows against its major peers after the Bank of Japan unexpectedly intervened in the bond market on Monday to rein in the steep rise in local yields.

The jump in the 10-year JGB yield came after the BoJ’s surprise move last Friday to adjust its yield curve control policy by widening the target band.

However, the tweak appears to have caused some confusion in the markets as it’s unclear if policymakers are targeting specific levels or ranges within the ±100-bps band around 0%.

For now, 0.60% seems to be a tolerance threshold, which although this is the highest Japan’s 10-year yield has been in nine years, it nevertheless signifies a major drawback for the yen as it puts investors permanently on edge.

The Bank of Japan has quite a task ahead of it in communicating more clarity around this policy shift and Governor Ueda will likely be put to the test in the coming weeks as there is a risk the yen resumes its freefall in the absence of clearer guidance.

The US dollar extended its advance against the yen on Tuesday, hitting a fresh three-week high of 142.84 yen.

But the greenback’s gains weren’t confined to the yen as the euro and pound drifted lower as upside attempts failed.

Whilst investors are more certain than ever that the Fed’s tightening cycle has reached its end, there is also growing confidence that the US economy will avoid a recession.

This is keeping the dollar supported as the economic outlook is notably brighter in the US than in Europe right now.

The Fed appears to share this optimism, which was evident at the July FOMC meeting and repeated by Chicago Fed President Austan Goolsbee yesterday.

Goolsbee did not take the option of a rate hike in September off the table, however, with credit standards continuing to tighten according to the Fed’s own lending survey, investors are hopeful that the existing rate increases will be enough to cool off the economy.

The ISM manufacturing PMI due later today could be crucial in deciding whether this optimism is justified.

Across the Atlantic, the Eurozone economy grew more than expected in the second quarter, but underlying inflation did not decline as much in July as had been predicted. The data out on Monday should have been positive for the euro but doubts remain about whether the ECB will be able to hike rates again.

The Australian dollar wiped out all of the prior day’s 1% gain on Tuesday after the Reserve Bank of Australia left the cash rate unchanged at its policy decision.

Although the RBA kept the door open to further tightening, the statement did not provide a very convincing argument of why additional rate increases might be needed and markets are now only 50% sure that the central bank will hike again this year.

The aussie came under so much selling pressure that it even fell against the yen. However, monetary policy is not the only factor hammering the currency as doubts about China’s economic prospects have started to creep back in.

The Caixin manufacturing PMI fell to 49.2 in July to a six-month low, representing a slight contraction and missing estimates of 50.3. Policymakers in China have been busy in recent weeks devising new measures to boost domestic consumption and the property sector.

But today’s data suggests the stimulus already announced may not be sufficient in reviving momentum in the world’s second-largest economy as the slowdown only seems to be deepening.

Oil futures rallied to three-month highs on Monday on the back of the stimulus headlines but were trading lower today following the poor PMI.

Regional stocks had also enjoyed a bit of a relief rally, while shares on Wall Street were lifted yesterday by upbeat earnings. The earnings season continues in earnest today with results from AMD, BP, Pfizer and Caterpillar on the way.