Japanese Yen advances to over two-month high against USD on BoJ rate hike bets

 

Japanese Yen advances to over two-month high against USD on BoJ rate hike bets

 

The Japanese Yen (JPY) bulls retain control heading into the European session on Thursday amid the growing acceptance that the Bank of Japan (BoJ) would hike interest rates further. Meanwhile, hawkish BoJ expectations push the Japanese government bond (JGB) yields to their highest levels in more than a decade. The resultant narrowing of the rate differential between Japan and other countries provides an additional boost to the lower-yielding JPY.

 

Apart from this, a fresh wave of the global risk aversion trade, triggered by US President Donald Trump's tariff threats, further benefits the safe-haven JPY. This, along with the emergence of some US Dollar (USD) selling, drags the USD/JPY pair closer to the 150.00 psychological mark, or its lowest level since December 9. That said, the Federal Reserve's (Fed) hawkish outlook could act as a tailwind for the buck and lend support to the currency pair.

 

Japanese Yen bulls retain control as hawkish BoJ expectations continue to lift JGB yields

Bank of Japan board member Hajime Takata said on Wednesday that Japan's real interest rates remain deeply negative and the central bank must adjust the degree of monetary support further if the economy moves in line with forecasts.

This comes on top of Japan's upbeat Q4 Gross Domestic Product (GDP) on Monday and cements expectations that the BoJ would hike interest rates further, which continues to push the Japanese government bond (JGB) yields higher.

According to a Reuters poll, over 65% of economists say that the BoJ could raise the key interest rate to 0.75% in the third quarter and the rate of pay increases in this year's labour talks is seen as 5.00% vs. 4.75% in January poll.

The yield on the benchmark 10-year JGB hits its highest since November 2009, which, in turn, provides a strong boost to the Japanese Yen during the Asian session on Thursday amid a fresh wave of the global risk aversion trade.

US President Donald Trump said on Wednesday that he will announce tariffs on a number of products next month or even sooner, fueling concerns about a global trade war and tempering investors' appetite for riskier assets.

The Asahi newspaper reported this Thursday that Japan's Trade Minister, Yoji Muto, is planning a trip to the US in March to request that the Trump administration exempt Japan from upcoming tariffs on steel and automobiles.

Minutes from the January FOMC meeting released on Wednesday revealed that officials noted a high degree of uncertainty that requires the central bank to take a careful approach in considering any further interest rate cuts.

Fed Vice Chairman Philip Jefferson noted that the US economic performance has been quite strong, the US labor market is solid, inflation has eased but is still elevated, and the path back to 2% inflation could be bumpy.

Separately, Chicago Fed President Austan Goolsbee said that inflation has decreased but it is still excessive and once inflation falls, rates can fall more. This, however, does little to provide any meaningful impetus to the US Dollar.

Thursday's US economic docket features the release of Weekly Initial Jobless Claims and the Philly Fed Manufacturing Index. Apart from this, speeches by influential FOMC members will drive the USD and the USD/JPY pair.