(Bloomberg) — The yen briefly breached the key level of 150 against the dollar as traders positioned for a stronger likelihood of the Bank of Japan raising interest rates in December while the Federal Reserve cuts US borrowing costs.
Most Read from Bloomberg
The Japanese currency surged as much as 1.1% to 149.86 to the strongest level since Oct. 21 following Tokyo consumer price data that came in hotter than expected. It was back around 150.22 just after midday in Tokyo, amid choppy moves that were likely amplified by month-end flows and low liquidity due to US markets being closed on Thursday for Thanksgiving.
The Japanese data offers further evidence that the economy is developing in line with the BOJ’s forecasts. Governor Kazuo Ueda has repeatedly said he will continue to raise rates from very low levels if the economy and prices continue in line with the central bank’s view.
“The Tokyo inflation data today, as well as hints of hawkish messages from the wage negotiations, are re-fueling bets of further policy normalization,” said Charu Chanana, chief investment strategist at Saxo Markets in Singapore, referring to the likelihood of the BOJ raising rates again. “Added to that mix are a weaker dollar and thin liquidity conditions as US traders enjoy their Thanksgiving dinners.”
The swaps market is now factoring in a 63% chance of a BOJ rate hike in December, twice the odds at the start of the month. It also sees a 67% possibility of a Fed cut.
Expectations of a narrowing of the difference in US and Japanese interest rates and by extension yield differentials will make the carry trade — a popular strategy where investors borrow in Japan and then deploy the funds in higher yielding markets — less attractive.
Friday’s gains brought the yen’s rally this week to about 3%, making it the best-performing Group-of-10 currency. The move to below 150 against the dollar takes the currency further from a risk of intervention. Japan has spent more than $100 billion this year propping up the yen, but is unlikely to step into markets with it well away from the 160 mark.
“The pressure for a stronger yen is increasing” with building expectations for a BOJ hike in December, Yujiro Goto, head of foreign-exchange strategy at Nomura Securities Co., wrote in a note. “The momentum of the Trump trade has also run its course and the pressure for a stronger dollar has eased, and the yen is being favored as a target for dollar selling.”