USD/JPY Fundamental Daily Forecast – Rising Fed Rate Hike Expectations Offset Intervention Fears

The Dollar/Yen soared to a new 24-year high on Friday as investors shrugged off the threat of another intervention by the Bank of Japan and as U.S. inflation expectations deteriorated, giving the Federal Reserve the greenlight to continue raising interest rates aggressively.

To reiterate, the spike higher by the Dollar/Yen on top of a long-term uptrend are not being fueled by manipulation or excessive speculation, but rather the divergence in policy between the hawkish Federal Reserve and the ultra-dovish Bank of Japan (BOJ).

Investors feel that as long as the Fed is raising rates and the BOJ is holding rates in negative territory, the U.S. Dollar will remain the most attractive currency. This is the primary reason why an intervention to drive the Japanese Yen higher will not have a long-lasting effect.

On Friday, the USD/JPY settled at 148.758, up 1.529 or +1.04%. The Invesco CurrencyShares Japanese Yen Trust EFT (FXY) finished at $62.82, down $0.62 or -0.98%.

Throughout the week, the USD/JPY edged higher on tentative trading as the threat of an intervention by the BOJ hung overhead, but the upside pressure fueled by hotter-than-expected U.S. inflation, coupled with a 100% chance of a 75-basis point rate hike by the Fed in November, proved too much to overcome.

No BOJ Interest Rate in Sight

Bank of Japan (BOJ) Governor Haruhiko Kuroda said on Thursday raising interest rates now was inappropriate in light of the country’s economic and price conditions.

“Japan’s economy is emerging from the COVID-19 pandemic’s wounds but the pace of recovery is slow compared with countries like the United States,” Kuroda said in a news conference after the G20 finance leaders’ meeting in Washington.

“It’s therefore necessary to keep supporting the economy” with ultra-loose monetary policy, he said.

Fed Seen Ramping Up Interest Rate Hikes

The Federal Reserve is seen delivering another large interest-rate hike on November 2 and ultimately lifting rates to 4.75%-5% by early next year, if not further, after a government report showed inflation remained stubbornly hot last month.

Traders of U.S. interest-rate futures piled into fresh bets on a more aggressive Fed, even pricing in a one-in-three chance that the Fed drives the policy rate above 5% next year, after a Labor Department report showed the consumer price index jumped 0.4% in September from August. From a year earlier, prices rose 8.2%, far above the Fed’s 2% target.

Short-Term Forecast

The last two paragraphs say it all. The BOJ’s Kuroda is brushing aside the chance of an interest rate hike, while the market sees the Fed raising rates 75% basis points next month and is even considering the need for a full-basis-point rate hike. This is why we expect the USD/JPY to extend its rally over the short-term.

Investors are chasing the higher yields in the United States, making the U.S. Dollar a more attractive asset than the Japanese Yen.

The BOJ could still intervene as Japan’s top currency diplomat Masato Kanda on Friday said authorities are ready to take decisive action in the currency market if excessive moves in the Yen continue. However, like last month’s intervention, the impact of the move is expected to be short-lived and have little impact of the USD/JPY’s long-term direction.