The yen weakened to its lowest level since early September, as the pace of narrowing yield differentials remains uncertain even after the US Federal Reserve cut rates.
The Japanese currency weakened as much as 0.2% to 145.04 versus the US dollar at 12.46pm Tokyo time, its lowest level since Sept 4.
Although the Fed cut interest rates by half a percentage point last week, Chairman Jerome Powell cautioned about the pace of easing, while Bank of Japan Governor Kazuo Ueda reiterated on Tuesday that the central bank isn’t in a rush to hike rates.
The yen has gained 11% so far this quarter after hitting a 38-year low against the dollar, but the market is now questioning how much the yield gap will narrow from here. Japan also continues to face robust capital outflows, a trade deficit and negative real interest rates, which are all weighing on the yen.
“The dollar/yen is likely to continue to fluctuate, with market expectations for the size of the interest rate cut at the next FOMC meeting in November changing in response to the strength or weakness of US economic indicators,” wrote Mizuho Securities strategists Masafumi Yamamoto and Masayoshi Mihara in a note.
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Traders are also preparing for Japan’s ruling party leadership election on Friday for any impact on the yen, as the new leader will most likely become the nation’s next prime minister. The market is focusing on the candidates’ differing monetary policy stances, particularly Sanae Takaichi, a minister for economic security, who said earlier this week that “it’s stupid to raise rates now.”
“Tomorrow’s LDP election is an event risk,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia. “Depending on which candidate wins, market pricing for BOJ rate hikes and the JPY can move sharply in either direction.”
Chart: Bloomberg
