The focus in dollar-yen trading is shifting to developments around the ¥155 level at year-end. The US-Japan monetary policy matrix and speculator positioning are expected to provide clues to price movements from next week onward.
Speculators are reportedly buying back yen this week, with leveraged funds’ yen short positions being reassessed from a level of around 100,000 contracts. Governor Ueda’s comments on rate hikes have once again drawn market attention to the outlook for the pace of rate hikes in Japan and the US, which is said to have affected yen movements. Some analysts also believe that the BOJ’s rate-hike outlook and economic indicators will influence monetary policy decisions from next year onward.
US CPI for August came in at +0.4% headline, +3.4% year on year, +0.3% core and +2.4% year on year, with the core increase exceeding expectations and temporarily raising pricing for a rate hike later this year. Meanwhile, PCE growth has accelerated in August and September, keeping attention focused on the Fed’s rate decision. The Cleveland Fed’s inflation nowcasting is regarded as important for future estimates, with the September headline reading expected to be flat while the core reading is projected to decline.
Risks to US markets include the midterm election results and an expansion of the term premium, which could affect long-term interest rates and the dollar. With the FOMC meeting and BOJ policy meeting scheduled for next week, dollar-yen is expected to see a battle around ¥152.10, while developments around the year-end level of ¥155 will also be in focus.
The US-Japan monetary policy matrix can be organized into six scenarios. Dollar-yen would fall the most if the BOJ raises rates consecutively in September and December while the Fed refrains from raising rates this year. The yen would weaken the most if the BOJ refrains from raising rates in December while the US raises rates in September and December.
The focus next week will be on speculator positioning. Some have indicated that the extent to which yen short positions had been reduced as of 8 September could provide a guide to whether the unwinding process has run its course.