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USD/JPY stays elevated despite growing odds of BoJ tightening

ING says markets are pricing about a 75.0% chance of a 25 basis point BoJ hike in September, but carry trades are still keeping USD/JPY underpinned.

Reported · Written up by our desk · Major Pairs

ING’s Chris Turner said recent moves in Japanese money markets are not translating into durable support for the yen, with USD/JPY still elevated. He noted that markets now price a high probability of a Bank of Japan hike in September, around a 75.0% chance of a 25 basis point increase, which has narrowed two year US to Japan swap differentials by roughly 40 basis points since mid July.

Turner argued that the widening interest rate expectations should weigh on USD/JPY, but the lack of yen follow through is likely due to benign conditions that continue to support yen funded carry trades. He added that if Fed rates stay unchanged, the risk is that USD/JPY could drop below 158.0, reflecting the pressure from the BoJ tightening pricing.

Latest closeUSD/JPY 159.49 ▲0.1%

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