Yen weakens towards 160.00 ahead of Fed speakers and US PPI

• USD/JPY reaches its highest since 2 September after escaping a seven-week trading range.
• The rate differential would remain intact if the Fed and BoJ deliver expected December increases.
• October producer price data from Japan precede Friday’s US release.

At just below 160.00, USD/JPY has reached its highest level since 2 September after moving out of a range that held for seven weeks. The 160.00 mark is now within reach for the first time since early September, ahead of further Fed speeches and US producer price figures before the weekend. The pair is trading slightly off that high, towards the upper end of Wednesday’s range.

A 0.4% increase in October’s Consumer Price Index (CPI) exceeded forecasts, while Fed Governor Waller described a rate rise at the 8-9 December meeting as likely. Futures markets now assign close to a 90% probability to a quarter-point increase at that meeting. With the Fed’s rate at 3.75%-4.00% and the Bank of Japan’s (BoJ) at 1.25%, the differential of at least two and a half points rewards investors holding Dollars rather than Yen.

Expectations also point to a BoJ increase. In October’s 8-1 decision, BoJ board member Takata favoured 1.50%; most economists anticipate that the other members will back his position at the 17-18 December meeting. If both central banks raise rates by a quarter-point, nine days apart, neither the differential nor the incentive to hold Dollars instead of Yen would change.

Economic releases and Fed speeches take focus

Due at 23:50 GMT on Wednesday, Japan’s October corporate goods price figures will be followed by third-quarter Gross Domestic Product (GDP) at 23:50 GMT on Sunday. Both releases will inform the BoJ’s December decision and, in turn, the Japanese side of the rate differential.

Thursday brings US jobless claims at 13:30 GMT, with a forecast of 195K compared with 189K. At 14:00 GMT, Cleveland Fed President Hammack begins a series of six Fed speeches that day. October’s US Producer Price Index (PPI) is due at the same time on Friday; forecasts point to a 0.4% rise, compared with September’s 1.3%. With a quarter-point Fed increase already priced in, both releases will help shape assessments of whether a half-point move is possible.

USD/JPY advances beyond its trading range

Having broken above the 156.00-159.00 band in place since late September, USD/JPY has retraced almost the entire decline from the 2 September high near 160.50 to September’s low around 153.00. On its previous two moves above 160.00, at the end of July and the beginning of September, the pair subsequently lost more than five Yen within a week.

Daily price chart for USD/JPY