Japanese Yen eases ahead of Fed and BoJ monetary policy decisions

Tuesday brings a modest rise in USD/JPY. Last week’s AI-related concerns are easing, weakening demand for the Japanese Yen (JPY) as a safe haven. This is helping the US Dollar (USD) regain its upward momentum before Wednesday’s monetary policy decision from the Federal Reserve (Fed).

157.85 is the pair’s approximate level at the time of writing. On Friday, it dropped to 156.08, its weakest since 18 September. The US Dollar Index (DXY), a measure of the Greenback against a basket of six major currencies, has climbed to around 102.23, a two-week high. Last week, it touched 101.45, its lowest since 1 October.

For OCBC analysts, the “JPY’s return as a portfolio hedge is worth watching.” This is despite their observation that recent “AI concerns have eased,” and their caution that “it is too early to call an AI bust,” as investors will “increasingly demand stronger revenues and cash flow to justify higher capex,” while “for now the jitters look more like noise than a sustained reversal.” Their assessment is that “AI remains broadly USD-positive, but it is no longer a one-way USD trade.”

An unchanged interest rate decision is expected from the Fed following September’s 25 basis points (bps) increase to 3.75%-4.00%. That was the first rate rise since 2023. Policymakers acted against inflationary pressure from higher oil prices amid the war in the Middle East.

With markets widely anticipating a pause, the policy statement and Chair Kevin Warsh’s press conference will be scrutinised for indications of a December rate rise. Traders assign an 80% probability to that outcome, according to the CME FedWatch Tool.

A 1.8% rise in US Durable Goods Orders for September, against expectations of 0.6%, provides modest backing for the Greenback in Tuesday’s data. The underlying figures were softer: orders excluding transportation grew 0.5%, just short of the 0.6% forecast, and growth in core capital goods orders decelerated from 1.6% to 0.5%. ADP’s four-week average of job gains also declined, from 17.5K to 16.8K.

For the Bank of Japan (BoJ), expectations also point to unchanged interest rates. The central bank tightened policy by a cumulative 50 basis points (bps) earlier this year, and traders anticipate a further increase in December.

The Yen “may well struggle through this week,” according to MUFG/BTMU analysts. Given the global backdrop, they believe investors are likely prepared for a more cautious tone from BoJ Governor Ueda on Friday. Although they expect the BoJ to recognise that “more rate hikes are necessary,” they point to Ueda’s communication style in suggesting he “may not provide a strong message on a move in December that remains 80% priced.”

With expectations already high, cautious guidance “could mean USD/JPY retraces further higher this week, especially if investor sentiment related to AI stabilises.” That is MUFG/BTMU’s assessment of the combination.