MUFG’s Michael Wan notes that the US Dollar (USD) is edging stronger, with USD/JPY moving closer to 162.00 as Asian currencies weaken in an orderly fashion. He highlights a sharp intraday move in the Japanese Yen (JPY) and possible policy discussions between US and Japanese officials. Wan argues that low Japanese real rates versus the US must change for a durable USD/JPY trend shift and expects at least one Bank of Japan (BoJ) hike by December.

Yen weakness persists as policy gap

"From a markets perspective, the Dollar continues to edge stronger with EUR/USD falling closer to the 1.14 levels and USD/JPY twitching closer to the 162.00 levels. With that Asia currencies have generally been modestly weaker but we note the moves have been orderly with risk sentiment and lower oil prices key drivers supporting FX and rates markets in our region."

"The Japanese Yen in particular saw a sharp drop intra-day from 161.93 to the 161.00 levels, before bouncing up to 161.60. It’s unclear whether this was driven by actual intervention, but what moved markets was news reporting out by NHK that Japanese Finance Minister Satsuki Katayama held an online meeting with US Treasury Secretary Scott Bessent together with Japan’s top currency official Atsushi Mimura, with officials potentially discussing views on the currency."

"Overall for USD/JPY, we think ultimately the fundamentals of low real interest rates vis-à-vis the US have to change for a durable shift in the trends, and as such the Bank of Japan likely has to signal a more hawkish path together with some easing of expectations of a hawkish Fed right now."

"Our expectation is that the BoJ will hike rates at least once more this year by December with the risk tilted towards earlier hikes, but in the near time the bias seems tilted towards USD/JPY moving higher until we get better clarity on that front."

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