Japanese Yen: BoJ hike expectations support JPY against US Dollar – MUFG

MUFG’s Derek Halpenny notes the Japanese Yen is firmer versus most G10 currencies as markets increasingly price a Bank of Japan rate hike in September. Services PPI data and hawkish commentary from former BoJ officials reinforce expectations of tightening, while upcoming BoJ speeches and a potentially cautious Federal Reserve at Jackson Hole could encourage further downside in USD/JPY.

BoJ pricing underpins Japanese Yen

"The yen is stronger against most of the rest of G10 this morning (apart from AUD) and market pricing indicates a continued gradual strengthening of expectations that the BoJ will hike in September."

"In contrast, the implied probability of a BoJ rate hike at the September meeting, which takes place two days after the FOMC, is 85%. The probability has not been higher since the last meeting in June."

"This is a BoJ data set and plays an important role in inflation outlook deliberations and will likely convince the BoJ of the need to hike even in circumstances when the FOMC could have remained on hold two days earlier."

"Former BoJ policy board member Seiji Adachi, in an interview with Bloomberg stated that the BoJ will likely raise rates in September and again in January (MUFG’s current view)."

"If there is no strong steer by Warsh on a hike in September (which seems likely) we would likely see front-end rates soften a little in the US and coupled with strong expectations of a BoJ rate hike could provide some impetus for a further decline in USD/JPY."