The Jpanese Yen (JPY) has continued to trade at weaker levels during the Asian trading session alongside the US dollar which has corrected lower in response to dovish comments from New York Fed President Williams who signalled he still sees room for another rate cut in December. Market expectations for a December Fed rate cut have been supported in recent days by the run of softer US economic data ahead of the Thanksgiving holiday, MUFG's FX analyst Lee Hardman reports. 

December Fed cut now more fully priced

"The US rate market has subsequently moved to more fully price back in a December cut. There are currently 20bps of cuts priced in compared to only around 9bps on 20th November. A temporary pause in the Fed’s rate cut cycle is viewed as more likely at the start of next year in January and March. If the Fed cuts rates in December as we expect, it is likely to be a hawkish cut with more dissents from FOMC participants setting up a pause early next year."

"If the yen continues to weaken heading into year-end it will increase the likelihood of the BoJ resuming rate hikes in December. Our colleagues in Tokyo have recently brought forward their forecast for the next BoJ rate hike to December from January, which they expect will be important in lowering USD/JPY back toward the 150.00-level by year end. A view that is becoming more popular among market participants as well. The Japanese rate market is currently pricing in around 13bps of hikes by December compared to only 5bps a week ago."

"The hawkish repricing of BoJ rate hike expectations has been encouraged by recent comments from BoJ officials including Governor Ueda who indicated he was monitoring the inflationary impact from the weak yen. However, market expectations for an earlier hike were not given further encouragement overnight from dovish BoJ member Asahi Noguchi. He suggested a measured, step-to-step approach to policy adjustments. The comments were less hawkish than in September when he stated the need to adjust rates was rising 'more than ever'."