Yen dives as BOJ hints no rate hikes while markets are volatile

By Ankur Banerjee

SINGAPORE (Reuters) -The yen slumped on Wednesday after an influential Bank of Japan official played down the chances of a near-term rate hike in a fresh twist to the week that started with massive moves driven by U.S. recession fears and unwinding of popular carry trades.

The yen was down more than 2.35% at 147.80 per dollar having touched session lows of 147.935 following the comments from BOJ Deputy Governor Shinichi Uchida.

"As we are seeing sharp volatility in domestic and overseas financial markets, it's necessary to maintain current levels of monetary easing for the time being," Uchida said.

His remarks, which contrasted with Governor Kazuo Ueda's hawkish comments made last week when the BOJ unexpectedly raised interest rates, sent the Nikkei higher and weighed on Japanese government bond yields. (T ) [JP/]

The BOJ's hike last week along with bouts of interventions from Tokyo in early July led investors to bail out of once-popular carry trades, in which traders borrow the yen at low rates to invest in dollar-priced assets for higher returns.

That took the yen to a seven-month high of 141.675 per dollar on Monday, from the 38-year lows of 161.96 it was languishing in just at the start of July.

But Uchida's comments could still prop up the carry trade, investors say, even with more room for unwinding of the trades.

"Uchida has saved the carry trade - for now," said Rong Ren Goh, a portfolio manager in the fixed income team at Eastspring Investments.

"There are also other moving parts, but yes, Japan policy is one of the important moving parts of the overall risk structure in the market. The other important ones would be U.S. economic data, which in turn informs Fed policy trajectory."

The yen's decline was broad based, with the Mexican peso, New Zealand dollar and Australian dollar - all carry trade candidates - surging against the yen. Euro and sterling were also higher on the yen.

The swing in yen positioning seen over the last one month was among the largest on record, according to strategists at JP Morgan, with their models suggesting 65% of yen shorts have now been covered as of Aug. 6.

Mark Matthews, head of research for Asia at Julius Baer, said there is no real need for the BOJ to continue raising interest rates much more than it has done already.

"After the dust settles, the very wide interest rate differential between Japan and other countries will once again become the primary determination of the yen’s valuation versus other currencies."

RATE CUT WAGERS

This week's market volatility was exacerbated by a softer-than-expected U.S. job report on Friday, and disappointing earnings from major tech firms, sparking a global sell-off in riskier assets as investors feared the U.S. economy was heading for a recession.

Traders have also adjusted their expectations from the Federal Reserve this year following the job report last week, with nearly 105 basis points of easing anticipated by year-end.

Markets are now pricing in a 70% chance of the Fed cutting rates by 50 bps in September, CME FedWatch tool showed, compared with an 85% chance a day earlier, with major brokerages also anticipating a large rate cut in the next meeting.

Some analysts, though, expect the Fed to take a measured approach.

"My sense is that the Fed is doing what it does, it wants some reaffirmation of the trend from several data points ... before drawing a conclusion," said Aninda Mitra, head of Asia macro and investment strategy at BNY Advisors Investment Institute.

On Wednesday, the euro eased 0.19% to $1.0910, while sterling was 0.11% higher at $1.2706, still not far from the five-week low it hit in the previous session.

The U.S. dollar index , which measures the currency against six rivals, rose 0.33% to 103.32, inching further away from the seven-month low of 102.15 it touched on Monday.

In other currencies, the Australian dollar was 0.64% higher at $0.65605, a day after the central bank ruled out the possibility of an interest rate cut this year, saying core inflation is expected to come down only slowly.



The Aussie has struggled in recent days, sinking to eight-month lows on Monday in the wake of the global market meltdown but perked up on the day following BOJ comments.

The New Zealand dollar was up 0.98% at $0.60125 following strong jobs data.

Source: Investing.com