FOREX-Yen languishes as focus turns to Fed

By Tom Westbrook

SINGAPORE, Nov 1 (Reuters) – The yen wobbled near 15-year lows on the euro and a one-year trough on the dollar on Wednesday, as market participants speculate whether Japan’s yield control policy adjustment will effectively address the wide interest rate gaps that have been putting pressure on the currency for an extended period.

In early Asia trade, there were modest movements ahead of a U.S. Federal Reserve meeting later in the day, where it is expected that rates will remain unchanged. Additionally, U.S. Treasury refunding details are set to be released.

The New Zealand dollar slipped 0.4% to $0.5805, following the release of employment data that fell short of expectations, solidifying the belief that interest rate hikes will soon come to an end.

Against the dollar, the yen experienced an overnight decline of about 1.7%, reaching a low of 151.74—just slightly above the level of 151.94 that triggered intervention from authorities a year prior. The yen also broke through the 160 mark against the euro for the first time since 2008.

Currently, the yen is at 151.27 per dollar, representing a 13% decline year-to-date and a 38% reduction from its peak during the pandemic. Against the euro, it stands at 160.05.

Investors are keeping a close eye on intervention as Japan’s top currency diplomat stated that recent movements seem to be speculative and that authorities are prepared to take action if necessary.

Although the Bank of Japan raised inflation forecasts on Tuesday, it did not make any changes to policy rates. The bank redefined the 1% limit on 10-year government bond yields as a reference rate instead of a hard cap, effectively ending its strict yield-curve control policy.

Data from the finance ministry also revealed that Japan did not intervene in currency markets throughout October.

Altogether, this suggests that there is no clear indication of any new official approach to bolster the yen’s strength, allowing traders to comfortably take up short positions, according to Alan Ruskin, a macro strategist at Deutsche Bank.

Ruskin noted, “It is now more evident than ever, that a proper turn in dollar/yen is much less dependent on events in Japan than they are on the macro dynamic in the U.S,” he said in a note.

From this perspective, the dollar has been positively affected by the favorable comparison between the U.S. and other major economies. On Tuesday, data revealed that European growth was slightly lower than expected, and there was a surprise decline in Chinese factory activity.

Story continues

In the U.S., data showed solid growth in wages and salaries during the last quarter. Although consumer confidence decreased, the decline was not as significant as anticipated. The euro fell 0.4% against the dollar overnight, currently nursing losses at $1.0579.

The U.S. dollar index, which measures the currency against major counterparts, rose 0.5% on Tuesday to 106.66. Sterling remained steady at $1.2150. China’s offshore yuan held at 7.34 per dollar amid a liquidity crunch in the onshore market, leading to overnight repo rates reaching as high as 50% as banks scrambled to obtain month-end cash.

Later in the day, China’s Caixin PMI data will be of particular interest, along with U.S. manufacturing and private payrolls figures, as they precede the Fed meeting.

In early Asia trade, U.S. yields rose while Japanese yields experienced a slight decline on thin volumes, resulting in a spread of 398 basis points between benchmark 10-year rates. This is narrower compared to the 414 basis points seen in October.

James Malcolm, UBS currency strategist based in London, mentioned that “Nominal 10Y rate spreads now warrant dollar/yen a fair bit lower, i.e., 147-8.” He added, “Though this relationship is becoming choppier, 10 basis points has been roughly equivalent to one big figure in spot over the last couple of years.”

(Reporting by Tom Westbrook; Editing by Shri Navaratnam)