Japanese Yen: Further gains favored against US Dollar - BBH

Brown Brothers Harriman’s Elias Haddad observes that recent oil-driven market movements and persistent US Consumer Price Index (CPI) inflation have bolstered expectations for a September Fed interest rate hike. However, futures market pricing already factors in nearly 100 basis points of tightening over the next year. With both the Federal Reserve and the Bank of Japan (BoJ) decisions looming large, the bank sees more favorable risks for the Japanese Yen and asymmetrical upside for the USD.

Brent crude oil prices surging above $100 a barrel fueled much of last week’s market dynamics, prompting higher bond yields, weighing on equities, and granting some support to the USD. Concurrently, the US August CPI inflation read kept the Fed’s hawkish case alive but did not justify a more aggressive rate hike. The USD quickly relinquished early gains and finished the session flat on Friday.

This week’s Fed and BoJ announcements will be the primary focus, with sentiment leaning towards a lower USD/JPY rate. Analysts expect almost 100 basis points of tightening over the next twelve months, with 25 basis points this week, another 25 by year-end, and around 50 by September 2027. This creates a skewed risk landscape for the USD, offering limited upside from hawkish outcomes but significant downside from a dovish surprise.

If the Fed were to hike rates by 25 basis points, the rally in the Japanese Yen would likely continue. A surprise 50 basis point hike could further supercharge the Yen. However, the bearish scenario for the Yen is limited to a 25 basis point hike or BoJ Governor Ueda deviating from market expectations.