The yen recovered from a walloping at the end of last week on Monday, with investors focusing on a meeting of the Bank of Japan that many expect to deliver further easing of monetary policy in a bid to halt the currency’s rise.
Bets on the yen to strengthen further reached a record high in the week to last Tuesday, while positioning on the dollar turned to betting on outright falls for the first time in more than a year. [IMM/FX]
That largely reflects market scepticism that the U.S. Federal Reserve, which also meets on Wednesday, will push on any time soon with rises in interest rates that the rest of the world economy still looks too shaky to deal with.
“Such has been the aggressive move by real money investors to sell the dollar since the start of this year, it just says there is no real faith in what the Fed are trying to do,” said Neil Mellor, a strategist with Bank of New York Mellon in London.
“It’s tempting to see this as a modest correction to the big move higher we saw last year. But if the dollar is going to rise again, they will have to rebuild belief on markets that they can deliver these higher rates without, say, a blowout in China.”
The dollar index traded 0.2 percent lower on the day at 94.963. Against the euro, it dipped to $1.1270, at the weaker end of a 10-cent range it has held for a year.
It fell half a percent to 111.24 yen per dollar.
A number of GDP reports accompany the central bank meetings later this week and strategists say markets may be cautious in the meantime.
Germany’s Ifo indicator on Monday may provide some direction, while sterling remains fixated on the ebb and flow of the Brexit referendum campaign.
Sterling was trading around its highest in a month against both the euro EURGBP= and dollar GBP= after U.S. President Barack Obama cautioned against Brexit and a handful of polls showed more support for staying in the European Union.
The yen fell 2.1 percent on Friday – its biggest fall since the day BOJ Governor Haruhiko Kuroda announced a second round of monetary easing in October 2014. The trigger was a Bloomberg report that the Bank of Japan is considering applying negative rates to its lending program for financial institutions.
But traders are also aware that further BOJ easing may have limited impact in weakening the yen, as did the introduction of negative interest rates in January.
“I’m a bit skeptical about how long the yen’s slide will continue. Financial markets appear to have a bleak view on the impact of negative interest rates on the economy,” said Kyosuke Suzuki, director of forex at Societe Generale.
With much of any further easing already priced in, the yen may have limited room to fall further after the BOJ’s policy meeting on April 27-28, some analysts also said.
“If the BOJ comes up with what’s already reported and a bit of stock purchases, that would lead to buy-on-rumor-sell-on-fact type of dollar/yen selling,” said Minori Uchida, chief FX analyst at the Bank of Tokyo-Mitsubishi UFJ.