Japanese Yen: Soft Dollar and BoJ outlook shift near-term tone – Scotiabank

Scotiabank strategists Shaun Osborne and Eric Theoret have noted that Japan’s July Consumer Price Index (CPI) and stronger August Purchasing Managers Index (PMI) data support expectations for the Bank of Japan (BoJ) tightening. This has resulted in around 20 basis points of hikes being priced into swaps, leading to a modest decline in the USD/JPY exchange rate.

From a technical perspective, they describe the situation as neutral to bearish, with losses below 158.25 indicating further downside. July's CPI reached 1.9%, meeting expectations, while preliminary August PMI data showed stronger-than-anticipated figures, suggesting robust momentum in both services and manufacturing sectors. The positive inflation data has slightly increased confidence in a BoJ tightening next month, with 20 basis points of hikes reflected in swaps.

The JPY gained 0.4% against the weaker USD on the same day. This near-term shift in sentiment may bring some relief to the JPY, as the USD dipped earlier in the week, but this confidence has not been seen this week. If USD losses fall below 158.25, it might signal more weakness to come.