Dollar-Yen Cap Reinforced by Ueda Hints

Above: File image of Kazuo Ueda, Governor at the Bank of Japan. © Sérgio Garcia/Your Image for ECB.

The Dollar-Yen exchange rate is looking more comfortable below 152 following hawkish comments from Bank of Japan Kazuo Ueda that signal the prospect of further rate hikes.

The Dollar-Yen exchange rate has this week retreated from the ceiling at 152, and is at 151.42 at the time of writing, following an interview given by Ueda to the Asahi Shimbun.

Ueda said the positive results of the Shunto spring wage negotiations will be reflected in wages through the summer and then reflected in higher consumer prices later in the year.

"The yen has been helped as well by hawkish comments from BoJ Governor Ueda," says Lee Hardman, Senior Currency Analyst at MUFG Bank Ltd.

The Pound to Yen exchange rate appears to be capped at 192 in the short term, while the near-term resistance for the Euro to Yen conversion is 164.36.

To be sure, what we are witnessing in all the Japanese exchange rates is a period of short-term consolidation within the context of a clear trend of multi-month weakness.

The question pertinent to those watching the JPY is whether we are finally seeing that weakness end ahead of a clear rebound.

For the Yen to turn a corner, investors must be convinced the Bank of Japan will raise interest rates and lower the differential between Japanese interest rates and those in other markets. For this to happen, Japanese inflation must converge on levels above the BoJ's 2.0% target.

And Ueda seems confident this is now happening. He said sustainably achieving the 2.0% target is "in sight" and that the likelihood will increase "rapidly".

He suggested interest rates can move higher if his views prove correct.

"Overall, the more hawkish tone of the comments supports our view that the BoJ will hike rates again sooner than expected in July," says Hardman.