Reluctant BOJ and dollar strength undercut yen
2024-02-22
Summary:
Despite Japanese officials' concerns over the yen's rapid decline, it traded below 150 per dollar on Thursday, marking a 6% drop this year.
The yen traded below 150 per dollar on Thursday despite warnings from Japanese officials that the pace of depreciation is “excessive” and “undesirable”. The currency has tumbled as much as 6% this year.
US and Japanese yield spreads have not narrowed as rapidly as expected on the recalibrated bets on rate cuts. Some investors believe that the next move by the Fed could be tightening rather than a policy pivot.
Whereas that forecast seems premature given policymakers’ narrative, we may still witness a repeat of the late-1990s: only a brief course of rate reductions that sets the stage for increases later.
Analysis of short-term interest rate options by Bloomberg Intelligence showed that traders began to price in some chance of a Fed hike over the next year in the wake of the CPI release last Tuesday.
Japan's government downgraded its view on the economy on sluggish consumer spending, suggesting a bumpy path out of a recession in the face of slow wage recovery and lacklustre industrial output.
That came after data showed the economy unexpectedly slipped into recession in Q4 on weak domestic demand, losing its position as the world's third-largest economy to Germany.
The yen remains in a consolidation pattern against the dollar with the biggest risk skewed towards the downside. The multi-decade low of 152.00 will likely put a floor under the price in the case of another dip.
Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
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