Yen stagnates as attention is drawn to the Fed

1 Nov 2023 , 10:27 AM

On Wednesday, the yen stumbled close to one-year lows against the dollar and 15-year lows against the euro due to speculation that Japan’s yield control strategy would not be sufficient to overcome the large interest rate discrepancies that have been undermining the currency for years.

Early Asian trading was relatively quiet ahead of the announcement of U.S. Treasury refunding information and a U.S. Federal Reserve meeting later in the day, where rates are expected to remain on hold.

As forecasts of a stop to interest rate hikes were reinforced by softer-than-expected employment figures, the New Zealand dollar fell 0.4% to $0.5805.

The yen dropped 1.7% against the dollar Friday night, reaching a low of 151.74, only a hair’s breadth from the 151.94 mark that sparked intervention a year prior. For the first time since 2008, the value of the yen exceeded 160 per euro.

It was last trading at 160.05 per euro and 151.27 per dollar, down 38% from its epidemic top and 13% for the year thus far.

Investors continued to be wary of intervention, as Japan’s top currency ambassador noted on Wednesday that authorities were ‘standby’ to intervene if necessary and that previous swings appeared to be speculative.

On Tuesday, the Bank of Japan increased its estimates for inflation but not for policy rates. It effectively ended its stringent yield-curve management strategy when it reinterpreted the 1% restriction on 10-year government bond yields as a reference rate rather than a hard cap.

Additionally, data from the finance ministry indicated that up until October, Japan did not interfere in the currency markets.

Data from the US revealed that while consumer confidence declined last quarter, it did so much less than markets had anticipated. Wages and incomes also increased significantly. Overnight, the euro lost 0.4% versus the dollar and held onto its losses at $1.0579.

On Tuesday, the value of the US dollar index relative to a group of important currencies increased by 0.5% to 106.66. At $1.2150, sterling remained stable. A lack of liquidity in the onshore market caused overnight repo rates to rise as high as 50%, forcing banks to rush for month-end cash. This kept the value of China’s offshore yuan stable at 7.34 per dollar.

Later on Wednesday, before the Fed meeting, the spotlight will be on China’s Caixin PMI data, which comes before the US manufacturing and private payrolls numbers.

Early Asia trade saw a rise in US yields but low volume saw a minor decline in Japanese yields, putting the difference between benchmark 10-year rates at 398 basis points. This is less than the 414 bps it reached in October.

For feedback and suggestions, write to us at [e-mail]