USD/JPY plummeted by around 1% overnight towards mid-158, with markets suspecting that an intervention or a rate check has occurred. We have doubts on that, as the size of the dip in USD/JPY is much smaller than that seen in Japan’s previous interventions, and the performance of the JPY this week is no stronger than the KRW. There is also a very good reason for the JPY to strengthen. BOJ’s Takata said yesterday that a 25bps rate hike is not necessarily set in stone (i.e. an outsized 50bps hike is possible), and that back-to-back hikes are a possibility. Markets have now shifted to pricing in a very, very small chance of a 50bps hike in September, compared to just a 90% chance of a 25bps hike at the start of this week. US Treasury Secretary Bessent’s earlier statement that he has more information than the market to shape his expectation of JPY strength now appears to be validated.
USD/CAD fell from around mid-1.39 towards mid-1.38 after the BoC struck a more hawkish than expected tone even as it kept rates unchanged. Markets were expecting the BoC to be cautious given an ongoing trade war with the US. However, Governor Macklem not only dismissed the risks of US tariffs by saying that it would not have a large impact on the economy, he added that upside risks to inflation have increased due to the Middle East situation, and that the Bank is prepared to adjust monetary policy as needed. This was a hawkish surprise, and markets have now shifted to pricing in a full rate hike by end 2026, compared to a 60% chance earlier this week.
NZD/USD tumbled sharply by as much as 1.5% after the RBNZ policy meeting yesterday, before recovering to mid-0.58 levels. While RBNZ hiked its policy rate by 25bps, the Bank also revised down its inflation outlook considerably in its Monetary Policy Statement. The RBNZ now expects Q4 CPI inflation to be at 3.9% rather than 4.1% in its previous forecast. Furthermore, the Bank has also downgraded its 2027 growth forecast to 2.7% from 3.5% earlier, citing subdued domestic consumption. Markets have now pared back rate pricing slightly and see just one more hike for 2026, but cumulative hike pricing till June 2027 has not changed much at all, and the NZD sell-off looks overdone in this context.
Quote of the Day
“Whether you believe you can do a thing or not, you are right.”
Henry Ford
Today in history
On September 3, 1967, Sweden officially switched from driving on the left-hand side of the road to the right-hand side in a massive national event called Dagen H.
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