Authors: Tom Westbrook and Amanda Cooper
SINGAPORE/LONDON (Reuters) – The Japanese yen hit a six-week high on Thursday, sparking speculation of an official rise, as investors awaited a meeting of the European Central Bank that was expected to determine the euro’s next move.
The European currency was hovering near a four-month high ahead of the ECB’s decision, which is almost certain to leave monetary policy unchanged, leaving investors to focus on the prospects for a rate cut in September.
“We expect the ECB to emphasize that future rate cuts will be conditional on continued declines in inflation and wage growth,” said Joe Capurso of the Commonwealth Bank of Australia (OTC:)
“There is a risk that prices for the September cut will be lowered.”
The euro held steady at $1.09325. Markets now indicate that investors believe eurozone interest rates will fall at least once this year, with another decline likely.
Meanwhile, the pound held close to a one-year high, falling below $1.30 after British data in May showed a slower-than-expected slowdown in wage growth, pushing the chances of an interest rate cut in August well below 50%.
Sterling was last trading at $1.2998 but is on track to rise 2.1% this year, making it the best-performing major currency against the dollar, largely due to the interest rate outlook.
“Markets see a BoE rate cut in August as less likely, while the chances of a Fed rate cut in September have increased,” said Andrew Goodwin, chief UK economist at Oxford Economics.
“I suspect that the recent appreciation will turn out to be short-term noise and that we will soon establish a pattern where both the BoE and the Fed ease policy at a similar pace. So that will probably stabilise sterling around its current level,” he said.
YEN’S RAPID GROWTH
The yen rose 0.53% overnight, while the dollar continued a prolonged downtrend that put it on track for its biggest two-week decline against the Japanese currency this year, falling 2.8%.
The dollar was last steady at 156.245, about 5 yen below its level of just over a week ago.
Bank of Japan money market data suggests authorities may have bought nearly 6 trillion yen ($38 billion) last week, and investors said this week’s moves showed signs of further intervention or at least markets that are easily spooked by the prospect.
“A lot of traders and Japanese investors were looking to add to their positions after the intervention,” National Australia Bank (OTC:) strategist Rodrigo Catril said in Sydney.
“A big move (on Wednesday) would catch them offside and cause a slight re-evaluation, if not relaxation, of those positions.”
Last week, the value of net brief yen positions remained close to a 17-year high.
Interest rate markets are pricing in more than 60 basis points of U.S. rate cuts this year and about 20 basis points of Japanese rate hikes, narrowing the wide interest rate spread that has encouraged investors to take enormous brief positions in the yen.
Catril and other analysts also drew attention to comments by U.S. presidential candidate Donald Trump, who in an interview with Bloomberg Businessweek described the strength of the dollar and the weakness of the yen and yuan as a sedate problem, which could cause a shake-up in the markets.
The yen has been the worst-performing G10 currency against the dollar this year, losing more than 9%, while the yuan has shed about 2.2%.
rose slightly as investors awaited news about a key leaders’ meeting in Beijing that is due to conclude later in the day. It was last at 7.2576 per dollar.
The Australian dollar eked out a miniature gain on mixed employment data to settle at $0.6738, while the New Zealand dollar fell 0.1% to $0.6075.
(1 dollar = 156.3600 yen)
