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Rate Hike Expectations in Japan and US: Room to Correct Excessive Yen Strength, Seeds of Carry Trade Revival
Digital FinanceMacro
Ahead of the monetary policy decision meetings in Japan and the US, there is a view that the sharp drop in the dollar/yen at the start of the month was overdone and will be corrected. With a September US rate hike now priced in at around 93% or more and the Bank of Japan at nearly 100%, rate hikes in both countries are almost fully priced in, and many believe it will be difficult for policymakers to show a hawkish stance beyond market expectations. The dollar/yen decline since early September has involved yen buying unrelated to interest rate differentials, and Hiroyuki Machida, a director at Australia and New Zealand Banking Group, pointed out that "there is more room for adjustment given how far it has fallen." Many also believe the dollar weakness and yen strength will not push below 152 yen, and while one-month implied volatility for the dollar/yen has risen to 9.5% from around 6-7% in July, some expect that if dollar strength and yen weakness pressure based on Japan-US monetary policy rises again, volatility will head lower and carry trades will return.