In early Asian trading on Thursday (July 25), the dollar hovered at a low against the yen (153.01, -0.7400, -0.48%), currently trading around 153.73. The dollar hit its lowest level in more than two and a half months against the yen on Wednesday, as short-yen carry trades were unwound ahead of the Bank of Japan meeting next week, with investors preparing for hawkish monetary policy officials to tighten policy.
The yen also rose to its highest level since mid-May against the euro (1.0837, -0.0003, -0.03%), as the market expected that the yield gap that makes it more expensive for foreign investors to hold yen securities will narrow.
The dollar index (104.3147, -0.0183, -0.02%) fell 0.08% to 104.35 on Wednesday, narrowing its losses slightly after S&P Global released the U.S. Composite Purchasing Managers' Index (PMI) for July. The U.S. composite PMI, which tracks manufacturing and services, rose to 55.0, the highest since April 2022.
“We are just watching concerns about global growth and we will see over the rest of the week whether that continues and whether things are different in the U.S.,” said Helen Given, deputy head of trading at Monex USA, highlighting China’s unexpected rate cut this week as a catalyst for those concerns.
“The latest U.S. PMI was quite positive, but it didn’t stand out,” she continued.
The main macro news this week is Thursday’s preliminary estimate of U.S. second-quarter gross domestic product (GDP) and Friday’s release of the personal consumption expenditures (PCE) price index, the Fed’s preferred inflation measure.
The Bank of Japan is likely to debate whether to raise interest rates when it meets next week and unveil a plan to roughly halve its bond purchases over the next few years, a sign of its determination to steadily unwind its massive monetary stimulus, sources said.
The rate decision will depend on how long committee members are willing to wait to see whether consumption will recover and inflation will stabilize around the bank’s 2% target, four people familiar with the Bank of Japan’s thinking said.
More than three-quarters of economists polled expect the Bank of Japan to hold off on policy this month, with the next move likely in September or October, but people familiar with the matter said the outcome of the July 30-31 meeting was less certain.
One of the sources said: Given the uncertainty about the consumption outlook, "the decision will be a close one and it will be difficult to make." Another said: "It is really a subjective judgment in terms of whether to act now or later in the year."
They said that while the nine-member board generally believes that a rate hike is necessary in the near term, there is no consensus on whether to do so next week or later in the year.
Core inflation hit 2.6% in June, exceeding the Bank of Japan's target for more than two years, and workers' basic wages rose by the highest rate in 30 years in May, which is enough for hawks to believe that conditions are now suitable for a rate hike.
The uncertainty about the outcome of next week's meeting is partly because the Bank of Japan sees no compelling reason to rush to raise rates, with price increases still mild and inflation expectations stable around 2%, the sources said.
"It is clear that the Bank of Japan is likely to raise rates in the coming months. It is just a matter of time," one of them said. "There is still a long way to go for the Bank of Japan. Even if it raises rates again, monetary conditions in Japan are still very loose," the second source said, a view echoed by two other sources.
This is despite many market participants expecting the Bank of Japan to raise rates this year. The Bank of Japan will set out detailed plans on how to slow its massive bond purchases and shrink its $5 trillion balance sheet at its July 30-31 policy meeting.
The BOJ is likely to gradually reduce its bond purchases in stages, at a pace roughly in line with mainstream market views to avoid an unwelcome surge in yields, the sources said.
This raises the possibility that the BOJ will roughly halve its monthly bond purchases within a year and a half to two years - a pace advocated by a significant number of participants in last week's meeting of central banks and financial institutions.
The Federal Reserve will also meet on the same day. While few expect the Fed to start cutting rates this month, it is likely to send a stronger signal of a rate cut in September given months of falling inflation and slowing economic growth.
The risk of a rate hike in Japan and recent rounds of suspected currency market intervention have caused speculators to close previously profitable "carry trades" with the yen as the funding currency.
The yen has been the best performing G10 currency so far in July.
The dollar fell 1.07% against the yen on Wednesday, hitting 153.10 yen, the lowest since May 6, and closed at 153.84. The euro fell 1.16% against the yen on Wednesday, hitting 166.13 yen, the lowest level since May 8.
Brian Daingerfield, a foreign exchange strategist at National Westminster Capital Markets, said, "Even if the statement from the Bank of Japan is not as hawkish as the market now expects, if this happens, the Ministry of Finance of Japan may still take action to prevent the yen from weakening. Of course, there is also the reality that the Federal Reserve seems to be close to starting an easing cycle."
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2024-07-25
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