Can the Japanese Yen Regain Ground as Traders Await Fed and BoJ Monetary Policy Decisions?

A retreat in safe-haven demand for the Japanese Yen (JPY) is lifting USD/JPY modestly on Tuesday, as last week’s AI-related concerns ease. The shift is allowing the US Dollar (USD) to return to its upward trend ahead of Wednesday’s monetary policy decision from the Federal Reserve (Fed).

Having touched 156.08 on Friday, its weakest level since 18 September, the pair is trading near 157.85 at the time of writing. The US Dollar Index (DXY), a measure of the Greenback against six major currencies, has meanwhile advanced to around 102.23, a two-week high. Last week, it had dropped to 101.45, its lowest reading since 1 October.

For OCBC analysts, the fact that “AI concerns have eased” does not diminish the significance of the Yen’s hedging role: the “JPY’s return as a portfolio hedge is worth watching.” Although they maintain that “it is too early to call an AI bust,” they say investors will “increasingly demand stronger revenues and cash flow to justify higher capex,” adding that “for now the jitters look more like noise than a sustained reversal.” Their assessment is that “AI remains broadly USD-positive, but it is no longer a one-way USD trade.”

Interest rates are expected to remain on hold at the Fed’s meeting, following September’s increase of 25 basis points (bps) to 3.75%-4.00%. That was the first hike since 2023, with policymakers acting against inflationary pressures arising from higher Oil prices amid the Middle East war.

As a pause is widely anticipated, the policy statement and Chair Kevin Warsh’s press conference will be scrutinised for indications of a December rate increase. Traders assign an 80% probability to such a move, according to the CME FedWatch Tool.

The Greenback has drawn modest support from Tuesday’s data: US Durable Goods Orders increased 1.8% in September against expectations of 0.6%. The underlying figures were softer, however. Orders excluding transportation rose 0.5%, just short of the 0.6% forecast, and growth in core capital goods orders moderated from 1.6% to 0.5%. Separately, ADP’s four-week average job gains declined from 17.5K to 16.8K.

An unchanged rate decision is also anticipated from the Bank of Japan (BoJ), following cumulative tightening of 50 basis points (bps) earlier this year. Traders nevertheless expect a further hike in December.

With the global backdrop likely to prompt a more cautious tone from BoJ Governor Ueda on Friday, investors are probably prepared for such an outcome, according to MUFG/BTMU analysts. They caution that the Yen “may well struggle through this week.” While they anticipate an acknowledgement from the BoJ that “more rate hikes are necessary,” they say Ueda’s communication style indicates he “may not provide a strong message on a move in December that remains 80% priced.”

MUFG/BTMU believes restrained guidance, alongside expectations that are already high, “could mean USD/JPY retraces further higher this week, especially if investor sentiment related to AI stabilises.”