Japanese Yen has been extending Q4, 2022 substantial gains into the first trading sessions of January, surging to levels that haven’t been seen since last June amid weakness in the U.S. dollar and Treasury yields as investors bet for even smaller interest rate hikes by the Federal Reserve in 2023 and less hawkish rhetoric.
The USDJPY pair fell as low as ¥129.50 a dollar in Tuesday’s Asian trading session before recovering to near ¥130.40 during the European session.
The pair has been on a downtrend momentum since topping near ¥152 level on October 21, 2022, driven by a less hawkish tone by the Fed’s policymakers together with an unexpectedly hit of a more hawkish tone by the Bank of Japan in early December, which increased expectations that it could tighten its ultra-loose policy in 2023.
Forex traders will also have one eye on the minutes from the Fed’s December policy meeting, due to be published on Wednesday, looking for any signals on whether the central bank intends to slow its pace of interest rate hikes further this year.
Federal Reserve hiked interest rates by 50 basis points in December following four consecutive 75 basis point increases, and markets will be keen to gauge the likely trajectory of monetary policy in 2023.
U.S. policymakers are widely expected to hike interest rates by 25 basis points when they meet in February, amid increasing signs that U.S. inflation has peaked from summer 9% highs to lows of 7% last month, and robust U.S. macroeconomic and labor data.
Japanese Yen has posted some outsizing gains this week, climbing as high as ¥130 a dollar following the Bank of Japan’s decision to allow the 10-year bond yield to move in a wider band, which might be the first step towards a broader monetary policy normalization process in the country to curb the record-high inflation.
On Tuesday, the USD/JPY pair hit a four-month low of ¥130,50 after the widely unexpected decision of the BoJ to widen the range within which it allows yields on the benchmark 10-year government bonds to fluctuate, a potential sign that the central bank eventually intends to tighten policy amid rising inflation.
According to the announcement, the BoJ will allow its 10-year Japanese government yields to rise as much as 50 basis points, or 0.5%, up from a previous cap of 0.25%.
The unexpected move has shocked forex traders helping the Yen to recover significantly against major peers, as the ultra-dovish monetary policy stance by BoJ was one of the main catalysts of the Yen to hit a multi-decade low of ¥152 a dollar in mid-November 2022.
Some investors have already started reversing their bullish bets on the USD/JPY pair on worries the BoJ’s hawkish swing on monetary policy could indicate the start of a hawkish policy change, while some others are debating that the move is a one-off technical adjustment.
Adding to the above, BoJ Governor Kuroda said the move was needed to correct distortions in the yield curve after global bond pressures pushed Japanese government bonds higher, and the action shouldn’t be viewed as the beginning of a hawkish pivot.