Can the range-bound Japanese Yen offer an upside hedge against the US Dollar? – BBH

USD/JPY remains under pressure near 157.30 following the Bank of Japan’s (BoJ) hawkish decision to hold rates, notes Brown Brothers Harriman’s Elias Haddad. While leaving rates unchanged, the BoJ indicated that tightening would continue, raised its inflation outlook and flagged upside risks to inflation. Haddad anticipates a broad trading range for USD/JPY, though a deeper sell-off in AI-related equities would strengthen safe-haven demand for the Japanese Yen.

Can the BoJ’s hawkish hold underpin the Japanese Yen?

"USD/JPY is heavy around 157.30. Bank of Japan (BoJ) delivered a hawkish hold. As was widely expected, the BOJ paused tightening and kept rates at 1.25%."

"Importantly, for the first time since adopting the 2% target in 2013, the BOJ declared underlying CPI inflation “generally consistent” with its goal. That strengthens the case for additional rate hikes to ensure inflation remains anchored there."

"Finally, the BoJ made minor growth revisions but raised its inflation forecasts for 2027. The BoJ also continues to see inflation risks “skewed to the upside” and the risk to the economic outlook as “generally balanced.”"

"There was no material shift to BoJ rate expectations. The swaps curve still price in 80% odds of a 25bps BoJ rate hike to 1.50% at the December 18 meeting and nearly 75bps of tightening in the next twelve months."

"As such, USD/JPY will likely continue to trade within a 155.00-160.00 range in the near term. But a deeper rout in the AI trade, can fuel more safe haven demand for JPY and drive the cross below 155.00."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)