Speculation grows about further hike in Japanese interest rates
The market is waiting for important economic data in the United States
The Japanese yen rebounded in the Asian market on Thursday against a basket of major and minor currencies, resuming its recovery from a two-week low against the US dollar, after the release of better-than-expected data on Japanese economic growth during the second quarter of this year.
The data has increased speculation that the Bank of Japan will raise Japanese interest rates for a third time before the end of this year, which is expected to reduce interest rates between Japan and the United States.
Inflation data released this week in the United States has strongly increased the chances of the Federal Reserve cutting US interest rates by about 50 basis points next September, and in order to re-evaluate these possibilities, investors are awaiting the release of important data on the US economy later today.
Price overview
Japanese Yen Exchange Rate Today: The dollar fell against the yen by about 0.15% to (147.14¥), from the opening price of today’s trading at (147.33¥), and recorded its highest level at (147.55¥).
The Japanese yen ended Wednesday's trading down 0.35% against the US dollar, after rising 0.25% the previous day in a recovery from a two-week low of 148.22 yen.
Japan's GDP grew 0.8 percent in the second quarter of this year, the National Statistics Office said on Thursday, beating market expectations of 0.6 percent growth, and the Japanese economy contracted 0.5 percent.
This positive growth is attributed to a strong recovery in consumption, which means more pressure on monetary policy makers at the Bank of Japan to raise Japanese interest rates for the third time this year.
Japanese interest rates: Strong growth data boosts chances of Bank of Japan raising interest rates for a third time this year, which is expected to renew pressure on carry trade unwinds.
US interest
US producer and consumer price data released this week showed more inflationary pressures easing for Federal Reserve policymakers.
Following this data, and according to the CME Group's FedWatch tool, pricing in the probability of a 50 basis point cut in US interest rates at the September meeting rose from 49% to 65%, and pricing in the probability of a cut fell by 25 basis points from 51% to 35%.
In order to reprice the above contracts, investors are waiting for the release of retail sales data and weekly jobless claims in the United States later today. Interest rate gap Investors have been selling the yen relentlessly for several months, due to the low interest rates in Japan compared to anywhere else, especially the United States, which led to the accumulation of bearish positions in the Japanese currency that some were forced to unwind.
The interest rate gap between the US and Japan has created a very profitable trading opportunity, as traders borrow yen at low rates to invest in dollar-denominated assets for a higher return, known as the carry trade.
Following the decisions of the Bank of Japan and the Federal Reserve in late July, the interest rate gap between Japan and the United States narrowed to 525 basis points in favor of US interest rates, the smallest gap since July 2023.
Given the current odds, the gap is expected to narrow to 475 basis points in September, with Japanese interest rates set to remain unchanged at the September 20 meeting.
Japanese Yen Performance Forecast
The Bank of Japan will take longer to raise interest rates given recent volatility in global markets and the rapid appreciation of the yen, BMI said in a recent note.
The institution added: The Bank of Japan will adopt a more cautious approach in raising interest rates to avoid a rapid appreciation of the yen.
The institution explained: It is expected that the Bank of Japan will raise interest rates by only 25 basis points this year, to reach 0.50%, which is less than previous expectations that indicated 50 basis points.
