FX Daily: Yen Back in the Spotlight Amid Bank of Japan Speculation

FX Daily: Yen back in the spotlight

Ahead of tomorrow's US jobs data release, the short-term highlight in the FX market is the continued outperformance of the yen. This has nothing to do with a risk-averse environment (asset markets are bid) and everything to do with the Bank of Japan potentially ending its negative interest rate policy. It looks like the yen can hold its gains near term.

 

USD: Mixed environment, yen strength stands out

FX markets remain relatively calm. One anomaly is that global risk assets (both bonds and equities) are doing quite well, but the dollar is staying quite bid. Normally one might expect the dollar to be easing gently lower in an environment like this. One explanation for this is that while interest rates are falling around the world (risk positive) they are actually falling faster overseas (especially in Europe) than in the US. Notably, EUR versus USD swap differentials are at the widest of the year and exposing the soft underbelly of EUR/USD.

But the short-term highlight is the outperformance of the yen. The focus here, once again, is whether the Bank of Japan (BoJ) plans to end eight years of negative interest rates when it meets on 18/19 December. The FX market has been here many times before with this story - only to be rudely disabused of its speculation every time.

However, at ING we have pencilled in a BoJ rate hike in the second quarter of next year. Our suspicion is that speculation of a BoJ move at the 18 December meeting is premature since there is no accompanying Outlook Report - a report that could show CPI sustainably hitting 2% and justifying an end to negative rate policy. That said, USD/JPY could still drift to the 144.50/145.00 area over the next week as speculation continues to build about a December BoJ move.

The underlying dollar story, however, will be determined, by tomorrow's US jobs report and next week's FOMC meeting. It looks like the US bond market is already pricing in a soft number - which warns perhaps of a firmer dollar if the data is not too weak. Yet we suspect that investors are in the mood to put money to work - noting a major pro-risk turning in the inflation and interest rate cycle - such that the dollar gets sold into any rally tomorrow. 

For today, we doubt jobless claims will be a big driver of price action today. We will be interested to look at the October US consumer credit data after the close today to see whether record-high credit card interest rates are finally taking their toll on the US consumer.

 DXY has been performing better this week, but we see a scenario where it stalls in the 104.25/50 area.