Karen Brettell
(Reuters) – The Japanese yen rose on Tuesday on reports that the Bank of Japan is considering raising interest rates to 0.25% at the end of its two-day meeting on Wednesday.
This would represent an upside from the current 0-0.1% level and more than the market is currently pricing in, with a 10bp upside still considered a mere 55% probability.
The Japanese central bank will also unveil plans to scale back its massive bond purchases as it gradually phases out a decade of massive monetary stimulus.
“We saw a pretty big move in the yen on the day,” said Shaun Osborne, chief currency strategist at Scotiabank in Toronto. “Some people thought that move had probably already happened, but I think there’s still potential for some of those carry trades and some of those positions to pull back a little bit.”
The dollar was last down 0.51% at 153.23 yen. The greenback has fallen against the Japanese currency since hitting a 38-year high of 161.96 on July 3.
Osborne believes the yen is a fair value at around 145 against the dollar, saying there is “still a long way to go before the short-term yen trade is completely cleared, or perhaps even reversed.”
The dollar has lost about 4.8% against the Japanese currency this month.
The yen weakened on Tuesday as investors closed positions ahead of Wednesday’s interest rate decision.
“It’s clear there were a lot of changes in July,” said Brad Bechtel, global head of foreign exchange at Jefferies in New York.
Bechtel believes any further strengthening of the yen will be fleeting, and the currency will continue to depreciate due to the wide spread between U.S. and Japanese interest rates.
“The yen will eventually get weaker over time. The question is how long that period is,” Bechtel said. “It doesn’t make sense to be long the yen because nobody wants to pay carry when they can earn carry in countless other ways in the currency market.”
The dollar weakened 0.07% to 104.51 against a basket of currencies, after earlier hitting 104.79, its highest level since July 11.
The Federal Reserve is expected to keep interest rates unchanged on Wednesday, though that could provide stronger indications it is closer to cutting rates.
Traders believe a rate cut in September is certain and are also pricing in a second and possibly third cut by the end of the year.
The US central bank, however, is wary of suggesting interest rate cuts too early, as this could raise the likelihood of such a signal appearing at the US central bank’s economic symposium, which will be held next month in Jackson Hole, Wyoming.
US data on Tuesday showed job openings in the US fell slightly in June, with the previous month’s figure being revised up. Meanwhile, consumer perceptions of the job market are deteriorating.
The euro fell 0.06% to $1.0813, having earlier touched $1.0798, its lowest level since July 8, as investors reviewed economic growth data.
The eurozone economy grew slightly more than expected in the three months to June, although a mixed picture and a series of cynical surveys cast doubt on the outlook for the rest of the year.
Germany’s economy unexpectedly shrank in the second quarter after avoiding recession at the start of the year, and inflation rose in July.
The pound weakened 0.17% to $1.2837 ahead of the Bank of England’s meeting on Thursday. Market valuations see it as more or less a coin toss whether the BoE will cut interest rates.
In the cryptocurrency market, bitcoin fell 2.06% to $65,973.
