Fed & BoJ policy updates reinforce upward momentum for USD/JPY

USD: Fed dampens expectations for another rate cut in December

The US dollar has strengthened modestly following last night’s FOMC meeting which has helped to lift the dollar index back above the 99.000-level. The US dollar has been supported by a hawkish repricing of Fed rate cut expectations. The 2-year US Treasury yield has jumped higher by around 7-8bps as market participants have scaled back the amount of further Fed rate cuts in the coming years. The main trigger for the hawkish repricing of Fed rate cut expectations were comments from Fed Chair Powell in yesterday’s press conference. He stated that there “strongly differing views” on the outlook for policy and emphasized that it is “not a foregone conclusion” that the Fed will cut rates at the next FOMC meeting in December. The US rate market is currently pricing in around 18bps of cuts still by December but had been almost fully pricing in another 25bps cuts just a couple of days ago. The developments highlight that hawkish voices have become more vocal although there was only one hawkish dissent against last night’s decision to lower rates by a  further 25bps from Kansas City Fed President Jeffrey Schmid who preferred to leave the policy rate on hold. On the other hand, Fed Governor Stephen Miran continued to dissent in favour of a larger 50bps rate cut.      

When pressed in the Q& A, Fed Chair Powell provided further colour on his thoughts on the December policy meeting.  He stated that “for some part of the committee it’s time to maybe step back and see whether there really are downside risk to the labour market, or see whether, in fact, the stronger growth that we’re seeing is real”. While adding that “if you’re driving in the fog, you slowdown” when referring to the recent lack of economic data during the ongoing government shutdown. In the accompanying policy statement, the Fed upgraded their assessment of economic growth to “moderate”. However, there was no change to their assessment of the labour market. Risks to the labour market were judged to have “rose in recent months” providing justification for the decision to cut rates further last night. Chair Powell did note though that “we do not see weakness in the jobs market accelerating” in the press conference.

Overall, we still expect the Fed to cut rates again as planned at the December FOMC meeting but it is data dependent based on the assumption that the labour market remains weak heading into year end, and that the government shutdown comes to an end allowing the Fed to better assess the health of the US economy. As a result, we do not expect overnight’s US dollar rebound to be sustained. The Fed’s other policy decision was to announce an end to quantitative tightening from 1^st December but it has less impact on the US dollar’s performance.        

USD/JPY VS. CARRY ATTRACTIVENESS

Source: Bloomberg, Macrobond & MUFG GMR

JPY: BoJ sticks to cautious stance over further rate hikes

The yen has continued to weaken against the US dollar overnight following the BoJ’s latest policy meeting which has contributed to a broad-based yen sell-off as well. It has helped to lift USD/JPY above the high from 10^th October at 153.27 thereby opening the door to further upside in the near-term. The next important resistance level is located closer to the 155.00-level. Yen selling momentum has been reinforced by the BoJ’s decision to leave rates on hold at 0.50%. The voting pattern was similar to at the previous meeting with only two hawkish dissents from BoJ members Naoki Tamura and Hajime Takata who favoured a 25bps rate hike today. The BoJ’s updated economic projections were little changed supporting their decision to leave rates on hold today. 

In the press conference, BoJ Governor Ueda maintained a cautious stance over  the outlook for further rate hikes. He reiterated that the BoJ plans to raise rates further if the economic outlook is met but stressed that uncertainty remains high. The likelihood of their economic outlook being realized is judged as “rising gradually”. He indicated that the BoJ wants to examine a little more about wage growth prospects in Japan, and needs to see more on firms’ wage-setting amid the impact from higher tariffs especially in the manufacturing sector for autos. He believes that there is not enough material yet to predict the results from the next wage talks. The BoJ is gathering data through branch manager meets and other means as it closely watches for any evidence of wage divergence by firm size and region. He did clarify though that the BoJ is prepared to hike rates before the wage negotiation results are finalized, and just wants to see initial wage growth momentum.                  

Governor Ueda also emphasized that if convinced, the BoJ will adjust rates regardless of politics although stressed he plans to work closely with the new government. It follows a recent post from US Treasury Secretary Scott Bessent calling on the new government to allow room for the BoJ to continue to normalize policy. The comments support our view that the BoJ will continue to raise rates gradually under new Prime Minister Takaichi. However, the BoJ’s policy update overnight indicates that they are in no immediate rush to resume rate hikes encouraging a weaker yen. The probability of a rate hike by December is currently priced at around 50:50 despite no strong signal at today’s meeting.

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com