Dollar to Yen Outlook: USD Surges to 33-Year Best vs JPY

October 31, 2023 - Written by John Cameron

STORY LINK Dollar to Yen Outlook: USD Surges to 33-Year Best vs JPY

The Bank of Japan (BoJ) did adjust its policy surrounding bonds and yields at Tuesday’s policy meeting, but the measures fell short of market expectations.

The US Dollar to Yen exchange rate (USD/JPY) is currently trading at 150.8725 (+1.19%)

According to ING; “All in all today's BoJ meeting has not triggered the reset on how we view the yen and the risk is now that USD/JPY pushes ahead to 152 and prompts the central bank into aggressive FX intervention.”

Overall yield spreads will remain an important negative factor for the Japanese currency, especially with the US 10-year yield above 4.80%.

The Japanese Finance Ministry will be wary over yen losses as it wants to avoid disorderly markets.

Traders will, therefore, still be wary over selling the yen aggressively given the risk of being caught out by intervention.

During Monday, there was increased speculation that the Bank of Japan would decide on a significant adjustment in monetary policy. Specifically, there were reports in the Japanese press that the ceiling for the 10-year yield would be increased to 1.5% from 1.0%.

The yen posted gains with USD/JPY retreating to lows just above the 149.00 level.

In the event, there was a limited policy adjustment with the 1% ceiling becoming a reference point rather than an explicit ceiling. The bank was also vaguer determining when the bank would intervene to cap yields with a more sustainable stance on buying bonds in the market.

There was no change in the formal yield curve control (YCC) target from 0% and interest rates were held at -0.1%.

The limited policy move disappointed markets and the yen slumped after the policy decision.

USD/JPY strengthened to test 12-month highs just above 150.70.

The yen was also punished on the main crosses.

The Euro to Yen (EUR/JPY) exchange rate surged to fresh 15-year highs just above 160.60.

The Pound to Yen (GBP/JPY) exchange rate also hit 6-week highs just above 183.60.

ING noted that the BoJ is still very wary over developments in bond markets; “One gets the sense from the BoJ that it is wary of JGB yields spiking, and that is why it is acting so very carefully here.”

It added that core inflation is forecast at 1.75% in fiscal 2025, not above 2% in a sustainable manner.

MUFG maintains a bearish yen policy on a short-term view; “Similar to after the last YCC policy tweak in July, today’s policy update appears unlikely to reverse the yen weakening trend on its own.”

It added; “It will place more pressure on Japanese policymakers to intervene if they want to prevent the yen from weakening further heading into year end.”

OCBC Bank strategist Christopher Wong took a slightly more positive yen stance; "The 1% is no longer a strict cap and so that means they will allow for JGB yields to rise above 1%. To some extent, this is as good as quietly allowing YCC to fade in the background."

HSBC chief Asia economist Frederic Neumann added; "Global investors will pay heed to the Bank of Japan's policy decision today, which signals a further step towards global monetary policy normalisation."

Marcel Thieliant, head of Asia-Pacific at Capital Economics was more definite; "The Bank of Japan today de-facto abolished YCC."

According to Credit Agricole; “We are calling it a 10Y JGB ceiling with a sunroof. So, the 10Y JGB yield may now go above1.00%, investors will just not know how far and it will be another episode in price discovery for JGB traders.”

It added; “A weaker USD/JPY will have to come from a weaker USD rather than a strong JPY.

TD Securities added; “Today's meeting is another disappointment for JPY bulls and JPY's fate lies in the hands of the USD and yield differentials once again.”

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TAGS: Japanese Yen Forecasts