In less than three days, the yen has shown a strong rebound against the US dollar, with a cumulative increase of over 2.8%, marking its best weekly performance since July this year. On November 28, the dollar against the yen continuously broke several key levels, reaching as low as 150.45, the lowest in more than a month. At the time of writing, the dollar stood at 150.57 yen, with a daily drop of over 1.6% and a cumulative decline exceeding 2.7%.
Market analysis points out that this wave of strong yen appreciation stems from traders' expectations that the US-Japan bond yield gap will narrow in December. As the market's evaluation of an interest rate hike by the Bank of Japan and a rate cut by the Federal Reserve increases, the yen's attractiveness has significantly risen. Overnight swap data shows that the market sees a more than 60% chance of a Japanese rate hike and a US rate cut, further supporting yen strength expectations.
Japanese Economic Data Continues to Gain Momentum
Japan's economic fundamentals have provided impetus for the yen's rise. According to the latest data, Japan's core CPI excluding fresh food increased by 2.3% year-on-year in October, staying above the international 2% inflation target for 38 consecutive months. This indicates that Japan's economic endogenous growth momentum has strengthened, providing the central bank with more room for policy adjustment.
The Governor of the Bank of Japan, Kazuo Ueda, recently stated in a public speech that the current policy rate is at an extremely low level, and gradual rate hikes will help achieve long-term economic growth and stabilize price targets. He reiterated that if the economic and price trends align with the central bank's expectations, the Bank of Japan may raise policy rates. Ueda also noted that the specific timing of rate adjustments would depend on domestic economic conditions, prices, and overseas economic dynamics, especially the movements in the US market.
Federal Reserve Turns Towards Easing
Meanwhile, the Federal Reserve's policy stance is quietly shifting towards a more accommodative direction. According to the minutes of the Fed's November meeting, officials believe that gradual rate cuts will be an appropriate policy choice if economic performance meets expectations. Hawkish official and Minneapolis Fed President Neel Kashkari earlier bluntly stated that a 25 basis point rate cut in December was a "reasonable consideration." The CME FedWatch Tool shows that the market now sees a 70% probability of a rate cut in December.
The Yen May Continue to Strengthen
Overall, the market generally believes that the policy moves of the US and Japanese central banks in December will become key drivers of exchange rate changes. If the expectation of a rate hike by the Bank of Japan and a rate cut by the Federal Reserve intensifies, the yen may further appreciate on its current gains. However, the market still needs to be cautious of the volatility that might result from economic and policy uncertainties.
Analysts remind investors to closely monitor economic data and central bank statements in the coming weeks, especially the upcoming Treasury yield trends, CPI data, and related meeting minutes from Japan and the US, as these factors will have significant impacts on the yen's exchange rate movement.
