JPY Weekly - 25 September 2023

Week in review

The USD/JPY opened the week at 147.86. It traded in a narrow range above 147.5 on 18 September, partly because this was a public holiday in Japan, and ahead of the FOMC and BOJ policy meetings later in the week. The stalemate intensified on 19 September in Tokyo trading hours when Japanese investors came back from the long weekend. The USD/JPY moved to recent new highs when overseas investors came online, but upside was curbed before reaching 148. The USD/JPY continued to trade sideways in Tokyo trading hours on 20 September, but yen selling picked up in the absence of any notable news and the pair broke past 148 for the first time since November 2022. The USD/JPY fell back to around 147.5 for a time in European through US trading hours, but the dollar strengthened after the FOMC statement was announced. The USD/JPY shot up to around 148 and rose to the low 148 level following Fed Chair Jay Powell's press conference. The dollar remained strong on 21 September and the USD/JPY rose to 148.46 in Tokyo trading hours, but it became top-heavy at this level because both Treasury Secretary Janet Yellen and Vice Finance Minister for International Affairs Masato Kanda had talked about foreign exchange intervention by Japanese authorities before the FOMC meeting, and with the BOJ monetary policy meeting still to come. On the same day in European trading hours, yen buying strengthened amid a lack of notable news and the USD/JPY fell back, falling to below 147.5 in US trading hours. It remained stuck around 147.5 on 22 September ahead of the BOJ meeting announcement but rose rapidly to the 148 level after the BOJ announced it would keep policy on hold before noon in Tokyo trading hours, then rose to the low 148 level by the time BOJ Governor Kazuo Ueda started his press conference. Governor Ueda kept his comments guarded at the press conference, and the USD/JPY tested the week's high of 148.46 at one point but had not reached this level at the time of writing this report (Figure 1). Major central banks held monetary policy meetings this week. The BOE and Swiss National Bank unexpectedly kept rates on hold, creating notable weakness in the sterling and the Swiss franc among G10 currencies (Figure 2).

FIGURE 1: USD/JPY

Note:Through 5:00pm JST on 22 September

Source: EBS, Refinitiv, MUFG

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

Note: Through 4:00pm JST on 22 September

Source: Bloomberg, MUFG

FOMC's hawkish rate hold

The FOMC kept its policy rate on hold as expected this week. The summary of economic projections (SEP) released at the same time was also in line with expectations, including upward revisions for growth, and reductions in the outlook for the unemployment rate and inflation. However, the federal funds rate forecast for 2024 was revised up. The outlook was changed to a 50bp rate cut in 2024 assuming one more hike this year. This is half the 100bp cut projected in the June SEP, essentially meaning the Fed has pushed back two rate cuts. The revision came as a hawkish surprise because the FF interest rate futures market had priced in one cut being pushed back at most. Fed Chair Jay Powell did not say the next rate hike would be in November but expressed confidence that the US economy would avoid a recession and gave a strong commitment to curbing inflation. He did not explain the hawkish shift in the dot plot. UST yields rose across a wide range of maturities and the dollar strengthened due to expectations that interest rates will remain elevated for some time. The immediate focus will be on whether the one remaining hike expected for this year will come in November or December, or whether the Fed will hold off after all. Next week, Powell is scheduled to speak on 29 September, but we see a dearth of catalysts for the dollar ahead of the jobs report and other major economic data releases in the following week.

No answers in BOJ statement, Governor Ueda gives cautious press conference

Meanwhile, the BOJ maintained its monetary policy. We thought the BOJ might change the wording "the Bank will not hesitate to take additional easing measures" in the statement, but the economic assessment, outlook, and guidance remained largely unchanged. It provided nothing that could fuel expectations for normalization that had grown in the financial markets following Governor Ueda's interview with the Yomiuri Shimbun on 9 September. Governor Ueda was asked many questions related to that interview at the post-meeting press conference, but he did not walk back what he had said or become more hawkish in his answers. His message was that monetary policy going forward will be data dependent, but he did not deny that policy normalization was in sight. However, the absence of any sign of a near-term shift in the BOJ's stance of maintaining monetary policy means this is unlikely to change conditions conducive to a weakening of the yen in the short term.

Risk that rising UST yields could actually curb dollar upside

We see a lack of catalysts next week in the wake of the BOJ and FOMC policy meetings. Governor Ueda is scheduled to hold a press conference on 25 September and Chair Powell will give speech on 29 September, but we do not expect these events to provide anything new coming right on the heels of the policy meetings and post-meeting press conferences. In any case, we expect the USD/JPY will continue to face upward pressure given the disparity in monetary policy remains unchanged. However, the continued rise in UST yields is putting pressure on share prices. This could reduce risk-tolerance and result in dollar-buying and yen-selling position adjustments. Meanwhile, although there are still concerns about currency intervention by the Japanese authorities, we expect yen sellers will remain confident in the short term given that the BOJ meeting passed without creating waves and Governor Ueda kept his remarks guarded. We will therefore be closely watching the risk of the yen weakening to a point that tests the stance of Japanese authorities amid a lack of events.

Forecast range

USD/JPY: 146.50 – 149.50