Traders ramped up protection against a surge in the yen as speculation remains alive the Bank of Japan may tweak its ultra-loose monetary policy Friday while other central banks eye an end to aggressive rate hikes.
(Bloomberg) — Traders ramped up protection against a surge in the yen as speculation remains alive the Bank of Japan may tweak its ultra-loose monetary policy Friday while other central banks eye an end to aggressive rate hikes.
A gauge of how much more traders are paying to hedge gains in Japan’s currency, rather than a fall, reached the highest level in over three years. That’s as bets increased that the Federal Reserve may pause in rates hikes after US policymakers raised the benchmark rate to the highest in 22 years.
The signal from the options market reflects nervousness about the BOJ moving away from its accommodative stance, a key driver behind the yen weakening to the lowest in almost eight months against the dollar in late June. Traders remain on edge even after Governor Kazuo Ueda indicated he’ll stick with easing as Japan’s central bank is some way from hitting its inflation goal.
“Market participants feel the need to hedge against the yen’s appreciation, given that the BOJ is seen adjusting policy sooner rather than later,” said Jun Kato, chief market analyst at Shinkin Asset Management Co. in Tokyo.
The European Central Bank is meeting today, and markets are looking for any signs it’s reached the end of its rate increases as traders trimmed bets on further Fed hikes this year. In contrast, the surge in hedging costs reflects expectations the BOJ will have to move away from its accommodative policy at some point this year.
One-week risk-reversals for dollar-yen have built up in the past few days as speculation mounts into the BOJ decision, reaching the most since March 2020 earlier in Asia. The yen has had a bumpy ride against the dollar this month, rebounding more than 5% from an eight-month low of 145.07 at the end of June before trimming gains on Ueda’s remarks last week.
Japan’s currency was steady at 140.05 per dollar as of 4 p.m. in Tokyo on Thursday after earlier gaining to 139.38. The foreign exchange markets were active, with the commodity-driven New Zealand and Australian dollars also strengthening against the greenback, and most major Asian equity indexes advanced.
In Japan, central bank officials are said to be considering a sharp increase to their inflation forecast for this fiscal year, a move that will probably boost the chance of a policy tweak in coming meetings.
The International Monetary Fund said this week that inflation risks in the world’s third-largest economy are on the upside, and the BOJ needs to prepare itself for the need to start tightening.
“Even if the BOJ decides to stand pat as expected this week, other factors including the degree of upward revisions to the inflation outlook may strengthen the view of adjustments in coming meetings and may spur gains in the yen,” Shinkin’s Kato said.
–With assistance from David Finnerty and Masahiro Hidaka.
(Adds ECB meeting in fifth paragraph, moves in other Asian markets in seventh paragraph.)
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