Yen dives as BOJ signals no rate hikes while markets are volatile

SINGAPORE – The yen slumped on Aug 7 after an influential Bank of Japan (BOJ) official played down the chances of a near-term rate hike, in a fresh twist to the week that started with massive moves driven by US recession fears and unwinding of popular carry trades.

The yen was down more than 2.35 per cent at 147.80 yen per US dollar, having touched session lows of 147.935 following the comments from BOJ deputy governor Shinichi Uchida.

Against the Singapore currency, the yen weakened 1.5 per cent to 110.53 yen per Singapore dollar as at 2.09pm local time.

Mr Uchida said: “As we are seeing sharp volatility in domestic and overseas financial markets, it’s necessary to maintain current levels of monetary easing for the time being.”

His remarks, which contrasted with BOJ governor Kazuo Ueda’s hawkish comments made last week when the BOJ unexpectedly raised interest rates, sent the Nikkei 225 index higher and weighed on Japanese government bond yields.

The BOJ’s hike last week, along with bouts of intervention from Tokyo in early July, led investors to

bail out of once-popular carry trades

, in which traders borrow the yen at low rates to invest in dollar-priced assets for higher returns.

That took the yen to a seven-month high of 141.675 yen per US dollar on Aug 5, from the 38-year lows of 161.96 it was languishing in just at the start of July.

But Mr Uchida’s comments could still prop up the carry trade, investors say, even with more room for unwinding of the trades.

“Uchida has saved the carry trade – for now,” said Mr Goh Rong Ren, a portfolio manager in the fixed income team at Eastspring Investments.

“There are also other moving parts, but yes, Japan policy is one of the important moving parts of the overall risk structure in the market. The other important ones would be US economic data, which in turn informs Fed policy trajectory.”

The yen’s decline was broad-based, with the Mexican peso, New Zealand dollar and Australian dollar – all carry trade candidates – surging against the yen. The euro and sterling were also higher on the yen.

The swing in yen positioning seen over the last one month was among the largest on record, according to strategists at JP Morgan, with their models suggesting 65 per cent of yen shorts have now been covered as at Aug 6.

Mr Mark Matthews, head of research for Asia at Julius Baer, said there was no real need for the BOJ to continue raising interest rates much more than it has done already.

“After the dust settles, the very wide interest rate differential between Japan and other countries will once again become the primary determination of the yen’s valuation versus other currencies.”

Bets on Fed rate cuts

This week’s market turmoil was exacerbated by a weak US jobs report on Aug 5 and disappointing earnings from major tech firms, sparking a global sell-off in riskier assets as investors feared the US economy was heading for a recession.

Traders have also adjusted their expectations from the Federal Reserve in 2024 following the jobs report last week, with nearly 105 basis points of easing anticipated by the year end.

Markets are now pricing in a 70 per cent chance of the Fed cutting rates by 50 basis points in September, the CME FedWatch tool showed, compared with an 85 per cent chance a day earlier, with major brokerages also anticipating a large rate cut at the next meeting.

Some analysts, though, expect the Fed to take a measured approach.

“My sense is that the Fed is doing what it does, it wants some reaffirmation of the trend from several data points... before drawing a conclusion,” said Mr Aninda Mitra, head of Asia macro and investment strategy at BNY Advisors Investment Institute. REUTERS