Fed Minutes Strengthen the Japanese Yen

The Japanese yen has grown above 100 to the dollar for the second time this week as the US currency’s campaign to escape a previous 3 month low that was stalled after the released Fed minutes signalled that officials were divided on the topic of how soon an interest rates hike should be performed. The Fed minutes implied that a rate increase is a possibility as early as September, but that the Fed won’t be pressure to take any action until a stronger consensus can be reached about the outlook for economic growth, employment and inflation.

This weakened the sentiment for many traders who were expecting a more hawkish stance from the Fed mostly due to their comments earlier this week when they implied the possibility of a rate hike in September.

A measure of the dollar has shed over 5% this year as investors bet that the Feds will raise interest rates at most only once this year, against the projection of 4 increases this year made by policy makers. The US Central bank is also likely to follow in the footsteps of the Bank of Japan and the European Central Bank who are bolstering stimulus to support struggling growth.

Angus Nicholson, a market analyst at IG Ltd. in Melbourne, stated that “There’s increasing doubt the Fed rate hike in December may even happen. In that scenario, a much weaker U.S. dollar will see quite a noticeable strength in the Japanese yen. There’s a view there in the market that there’s little the Japanese government or the Bank of Japan can do about it in such a scenario.”

Strategists at Bank of Tokyo-Mitsubishi UFJ Ltd. and Morgan Stanley forecast that “the yen will extend this year’s 20 percent gain versus the dollar”

The yen made its strongest climb since June 24, as it rose by 4% to 99.93 against the dollar at 7:20 am in London trade after a previous move to 99.54 on Tuesday. The yen is currently about to achieve its longest gain streak since June after rising for 5 consecutive days.

Vice Finance Minister Masatsugu Asakawa stated on Thursday that, “Japanese authorities are closely watching for speculative moves in the exchange rate as it has been volatile”

Tokyo stocks also hurt market sentiment as it led to Bullish bets on the JPY due to the safe haven perception of the currency. The Nikkei stock Average dropped by 1.1% in early morning sessions before reversing to cover some of its losses finally settling for a 0.2% drop.

“I don’t think investors are buying the yen aggressively,” said Marito Ueda, director at FX Prime by GMO. “To put it the other way around, there is no reason to buy the dollar and others in a positive manner, given the Fed’s cautious stance toward raising short-term rates and continued thin market volume due to the summer holiday”, he said.

“The possibility is now even lower of Fed chair (Janet) Yellen giving hawkish signals to smooth the way for a September rate increase at the Fed’s Jackson Hole symposium on Aug. 26”, said Nomura Securities chief FX strategist Yunosuke Ikeda in a morning note. He added that he expects “any full-fledged dollar buying will now be pushed back to November-December”.