Japanese Yen: Sharp rebound and Fed repricing – MUFG

MUFG’s Michael Wan highlights a sharp strengthening in the Japanese Yen, with USD/JPY dropping from 160 to around 155.30 as the Dollar broadly weakened and Asian FX gained. The report notes uncertainty over any Bank of Japan (BoJ) intervention, discusses hawkish BoJ rhetoric, and argues that excessive Fed rate expectations should unwind, leading to a weaker Dollar over time.

Yen surge and Dollar repricing

"There were significant moves in the FX market, with the Japanese yen in particular strengthening sharply from the 160 level on 2 Sep all the way down to as low as 155.30 overnight, a 5 big figure move."

"It is not entirely clear whether the moves in USD/JPY were driven by FX intervention, but from what we do know Bank of Japan current account data for Wednesday do not suggest the moves were driven by intervention."

"More generally on the Bank of Japan front, BOJ Board Member Takata – one of BOJ’s most hawkish members - gave a speech earlier this week leaving the door open for an outsized interest rate increase as well as back-to-back hikes."

"This led the JPY OIS market to start to price in some chance albeit small right now of more than 25bps hike in BOJ’s September meeting."

"Overall, these views and developments fit in with our global teams’ views that pricing for Fed hike rate expectations are too excessive especially post the Jackson hole meeting, and the Dollar should weaken over time."