Yen May Breach 165 Per Dollar Ahead of BOJ Meeting, Heightening Intervention Risk
Summary
- Markets expect the BOJ to hold its benchmark rate steady, with Ueda's remarks likely to determine the yen's next move.
- If Ueda fails to sound sufficiently hawkish, the yen could weaken further and move beyond 165 per dollar.
- If the BOJ press conference is interpreted as dovish, a move above 165 per dollar could trigger foreign-exchange intervention.
Forecast Trend Report by Period
The yen has extended its decline ahead of the Bank of Japan's policy meeting, with investors watching whether it could weaken beyond 165 per dollar if BOJ Governor Kazuo Ueda fails to signal a sufficiently clear path to further rate hikes.
Bloomberg reported on July 28 that markets expect the BOJ to keep its benchmark rate unchanged on Friday. Attention is centered on whether Ueda offers any clues after the meeting on the timing of the central bank's next increase.
The yen fell in June to its weakest level against the dollar since 1986 and has remained under pressure this month. Rising oil prices, concerns over Japan's fiscal health and the interest-rate gap between the US and Japan have all weighed on the currency.
"If Governor Ueda is not hawkish enough, the yen will weaken further and move beyond 165 per dollar," Mark Dowding, chief investment officer at RBC BlueBay, said. He expects Ueda to leave the door open to a rate increase at the BOJ's September or October meeting, but not to deliver remarks strong enough to trigger a sharp turnaround in the yen.
Within the BOJ, the yen's weakness is also adding to discussion of speeding up the pace of rate hikes as it intensifies inflation pressure. Even so, half of the economists surveyed by Bloomberg expect the BOJ to delay its next rate increase until December.
Markets are looking for stronger hawkish signals than expected from Ueda to calm the yen's slide, including a clearer indication of when the next rate increase could come. Overnight index swaps currently price in about a 29% chance of a BOJ rate hike by September and about a 78% chance by October.
The prospect of currency intervention is also back in focus. "If the BOJ press conference is interpreted as dovish, the yen could easily move beyond 165 per dollar, and that would trigger foreign-exchange intervention," Taketomo Shimizu, chief bond investment officer at Asset Management One, said.
