The yen attempted a counterattack as Japan's government resumed verbal interventions and the Bank of Japan struck a hawkish tone. Dollar selling helped the move, but the wide bond yield spread between the US and Japan suggests the USDJPY uptrend remains intact, according to FxPro analysts.
The yen attempted a counterattack against the dollar, helped by the government's resumption of verbal interventions and hawkish rhetoric from the Bank of Japan. The US dollar, meanwhile, went on a rollercoaster ride as consumer prices surged.
Dollar goes on a rollercoaster ride as US inflation surges
US consumer prices surged in September to a five-month high of 3.7%, and inflation exceeded forecasts. The data raised the chances of the Fed tightening monetary policy in October to 50% and propelled the US Dollar Index to 18-month highs.
However, those odds subsequently plummeted to 25%. Investors turned their attention to Kevin Warsh's speech in Bangkok, looking for clues on the outlook for interest rates and the greenback. At one point, the probability of four rounds of Fed tightening over the next 12 months soared to 61% before it returned to its previous level.
Tokyo warns on intervention
Finance Minister Satsuki Katayama warned that her ministry is prepared to intervene in the foreign exchange market if necessary. Meanwhile, BoJ board member Junko Koeda noted that the BoJ should not be overly cautious in raising interest rates.
Yield gap keeps the uptrend in view
Nevertheless, the futures market anticipates that the Fed and the Bank of Japan will tighten at the same pace. Given the wide bond yield spread, FxPro analysts suggest the fall in USDJPY should be viewed as a correction within an uptrend.
According to BlackRock, a record federal budget deficit and competition from technology companies to raise capital are creating the conditions for structurally higher interest rates on debt over the long term. The wide yield spread between US and Japanese bonds will push the pair higher until the pace of monetary tightening by central banks changes, the analysts say.
Source: ActionForex
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