JPY Weekly - 20 November 2023

Week in review

The USD/JPY opened the week at 151.47. The yen was sold at the start of the week on the morning of 13 November in the Tokyo session amid a lack of any notable news. The USD/JPY looked top-heavy above the end-October high of 151.74, but then rose to 151.92 after overseas traders entered the market due to a rise in UST yields and dollar appreciation. It fell swiftly to the lower 151 level, partly due to growing concerns of intervention by Japanese authorities as last year's high of 151.94 came into view. The pair then recovered to above 151.50 and remained at that level on 14 November. UST yields fell sharply, and the dollar weakened across the board after the closely watched October CPI report, released during US trading hours, came in below the market's forecast. This sparked a rapid fall to below 151, with intermittent selling thereafter widening the decline to 150.17. However, yen cross rates rose during that time, with the EUR/JPY hitting a new high. The USD/JPY recovered to around 150.50 on 15 November but was pulled down by moves to undo the previous day's rise in yen cross rates after European traders entered the market. The USD/JPY fell to a weekly low of 150.05 after the October PPI announced in US trading hours was softer than the market had expected. However, US interest rates rose sharply, and the USD/JPY rallied quickly to recover to above 151 after a solid print for US retail sales for October, announced at the same time. The USD/JPY approached 151.50 toward the close and remained at this level on 16 November. It became top-heavy as the market approached its recent highs, in part due to concerns of intervention by Japanese authorities. The dollar weakened again in US trading hours due to a weaker-than-expected import price index for October and because the previous week's US new jobless claims were higher than the market had forecast. As a result, the USD/JPY fell to around 150.50. It was trading around this level at the time of writing this report on 17 November (Figure 1).

The dollar weakened across the board this week following the release of the CPI and other data. The yen also weakened, and yen cross rates rose across the board. The yuan also softened, indicating weakness in currencies of countries where central banks are in easing mode (Figure 2).

FIGURE 1: USD/JPY

Note: Through 11:00am JST on 17 November

Source: EBS, Refinitiv, MUFG

FIGURE 2: MAJOR CURRENCIES' RATE OF CHANGE VS USD THIS WEEK

Note: Through 11:00am JST on 17 November

Source: Bloomberg, MUFG

Fed rate hike cycle likely over

The US CPI for October, announced on 14 November, rose 0.0% MoM in the all-items index and 0.2% in the core index, slowing more than the market had forecast. In last week's report, we warned of the risk of the CPI overshooting expectations, partly because in a recent speech Fed Chair Jay Powell had voiced concerns that a rise in wages could reaccelerate inflation. However, such concerns retreated after the release of PPI, import prices, and other data that missed expectations across the board. Based on the CME FedWatch tool, a US newspaper reporter said that more robust data was probably needed for any further rate hikes. The FF interest rate futures market has completely factored in that the current rate hike cycle is over, and expectations for rate cuts in 2024 have expanded to 100bp. At the time of writing this report, the 10y UST yield had also fallen to below the 4.50% seen as a bottom this month until now. It seems that conditions have changed considerably over the past week, as is the case with the climate in Japan. Next week, the minutes of the previous FOMC meeting will be released on 21 November ahead of the Thanksgiving holiday in the US on Thursday, with no speeches by senior Fed officials or key economic data releases on the schedule. A few senior officials are scheduled to speak after we finish this report on 17 November, but basically we expect the dollar to continue to weaken. The US Senate passed a stopgap spending bill on 15 November which is expected to be signed by President Joe Biden, averting a government shutdown from 18 November. This should reduce the risk of sudden fluctuations in financial markets.

Yen weakens despite dollar weakness across the board

Expectations in the currency market that the BOJ would normalize policy have been pushed back, in part because Governor Kazuo Ueda's recent comments have been generally viewed as dovish. The BOJ's policy revisions in October suggest that long-term interest rates could rise further, but with policy on short-term rates (= negative rates) untouched, the prevailing view is that a near term rise is unlikely. This has created a sense of security for overseas traders, who do not normally hold yen, to raise yen funds and enter yen selling trades. This week's Jul-Sep real GDP growth fell an annualized 2.1% QoQ, increasing expectations that normalization of monetary policy will be delayed. In this environment, yen cross rates rose, and the yen continued to weaken despite the dollar weakening across the board. Governor Ueda spoke before the Diet while we were writing this report, but his responses remain guarded. He does not deny that the BOJ has normalization in its sights but said that making any strong remarks could pose unexpected risk to the markets. This comment highlights the BOJ's desire to hold back heightened expectations of normalization, meaning sentiment about the BOJ's monetary policy is unlikely to change in the near term. We expect the dollar and yen to continue weakening.

Meanwhile, concerns of foreign exchange intervention by Japanese authorities are likely to continue to limit USD/JPY upside. MOF officials did not step-up warnings aimed at checking yen weakness this week, but Vice Finance Minister for International Affairs Masato Kanda's comment about the government being on "stand by" continues to weigh. We remain cautious of moves by authorities as the USD/JPY is likely to continue to fluctuate sharply.

Forecast range

USD/JPY: 149.00 - 152.00