The Japanese yen experienced significant weakening against other currencies on Tuesday and Wednesday, despite the Bank of Japan's decision to raise interest rates by 0.1% - its first such action in 17 years.
The central bank also discontinued its negative interest rate policy (NIRP) and yield curve control (YCC) mechanism. However, Governor Kazuo Ueda emphasized the importance of maintaining a dovish stance in the near-term to support the Japanese economy, stating that the BOJ would continue purchasing Japanese government bonds at a steady pace.
Following Ueda's comments, the yen depreciated sharply, with the USDJPY pair reaching its highest level since mid-November, exceeding 151 against the dollar. Similarly, the yen weakened considerably against the euro, with the EURJPY pair reaching levels not seen since the 2008 global financial crisis, hovering around 164.31.
The anticipation of a Federal Reserve meeting further exacerbated losses in the yen, as traders shifted towards the dollar amid expectations of a more hawkish stance from the central bank. Analysts emphasized that the Fed's decisions and U.S. interest rates remained significant factors influencing the yen's movement.
Citi analysts noted that while the BOJ's actions had historical significance and could potentially bolster the yen in the future, the currency was currently more susceptible to short-term weakness. They suggested that USDJPY could climb as high as 152, beyond which Japanese government intervention in the currency markets might occur.
Looking ahead, Citi analysts underscored that the trajectory of U.S. interest rates would continue to drive USDJPY, with any dollar weakness resulting from Fed interest rate cuts likely benefiting the yen. They maintained their forecast of USDJPY falling to 140 or below by the end of 2024
Similarly, analysts at Macquarie emphasized the importance of U.S. interest rate differentials in influencing USDJPY, predicting a decline in the currency pair in the latter half of 2024, contingent upon the Fed commencing its easing cycle. They anticipated a gradual weakening of USDJPY if the Fed's rate cuts were implemented at a measured pace.
Paraphrasing text from "Investing" all rights reserved by the original author.
