Japanese Yen: Fed and energy drivers outweigh BoJ – ING

ING’s Chris Turner and Padhraic Garvey expect the Bank of Japan to keep its policy rate at 1.00% on 31 July, with any modestly hawkish shift seen as unlikely to materially boost the Yen or change the USD/JPY trajectory. They argue that energy prices and the Federal Reserve’s reaction function will dominate USD/JPY over coming months, with a year-end forecast at 158 assuming no further Fed hikes.

Fed and energy seen in control

"The Bank of Japan is expected to keep rates unchanged on 31 July after last month’s 25bp hike to 1.00%. While some see scope for a faster tightening cycle and an October hike, we doubt any modest hawkish shift will materially boost the yen or alter the USD/JPY outlook."

"Energy prices and the Fed reaction function look to be the bigger driver of USD/JPY over the coming months, rather than a potentially more hawkish BoJ. And Wednesday’s FOMC meeting will have a big say here. Barring a surprisingly dovish Fed meeting, or a sudden drop in Brent back to $70/bl, we expect to stay bid near 163/164 into the BoJ meeting."

"There is an outside risk of USD/JPY making a run at 165 if Governor Ueda is insufficiently hawkish in his press conference, but the risk of FX intervention remains. Here the BoJ spent $70bn in late April/early May and has remaining FX reserves of $1.09 trillion. Without doubt, Japanese authorities would prefer to sell USD/JPY into a falling market for greater effectiveness, but likely would be called into action should the 165 area be challenged."

"As to the longer-term outlook for USD/JPY, we have a year-end forecast at 158 on a baseline view that the Fed does not hike."

"There is also speculation that the Japanese government is looking at measures to support the yen by encouraging Japanese investors to keep more money at home."