Yen advances after BOJ takes steps to make yield curve control flexible

By Ankur Banerjee

SINGAPORE (Reuters) – The yen rallied hard in volatile trading on Friday after the Bank of Japan announced it will make its yield curve control policy more flexible, while the dollar held steady against most other rivals following better-than-expected U.S. economic data.

Chopping and changing direction as traders digested the BOJ decision, the yen strengthened to as much as 138.05 per dollar before weakening to 141.20. The Japanese currency was last at 138.60, up 0.61% against the dollar.

The yen was also broadly higher against other peers, rising 1.4% against the Australian dollar, touching near two month peak of 91.81. The Japanese currency was up 0.6% against the euro and 0.5% against Singapore dollar.

The BOJ’s two-day policy meeting ended on Friday with a decision to keep unchanged its short-term interest rate target at -0.1% and that for the 10-year government bond yield around 0%.

But markets attention was drawn to the BOJ saying it would offer to buy 10-year Japanese government bonds (JGB) at 1.0% in fixed-rate operations, instead of the previous rate of 0.5%.

“Even though market reaction is choppy, this is a clear sign that BOJ will take mini-steps to tighten policy if inflation pressures remain,” Charu Chanana, market strategist at Saxo Markets, said.

“Effectively, markets will test the 1% cap and that can be bullish for the yen, while global liquidity conditions could be impacted as well as yen carry trades start to reverse.”

The Australian dollar slid 0.75% to $0.6659, while the New Zealand dollar eased 0.37% to $0.6159. [AUD/]

The and are among the most liquid of the carry trades in which investors typically borrow yen at super-low rates to buy higher yielding currencies.

Since introducing YCC in 2016, the BOJ had little trouble controlling bond yields when inflation remained well below its target. That changed last year, when soaring commodity prices pushed inflation above the 2% target and gave investors reason to attack the yield cap.

Joey Chew, head of Asia FX research at HSBC, said verbal communication from the BOJ is likely to be dovish and doubts that this will be the end of dollar/yen volatility in the near term.

“With short JPY speculative positions being cut dramatically recently, the market could be prone to a squeeze.”

CENTRAL BANK WEEK

Earlier this week, the U.S. Federal Reserve and the European Central Bank hiked policy rates by 25 basis point, as expected.

However, the ECB raised the possibility of a pause in September as inflation pressures show tentative signs of easing and recession worries mount.

“There is the possibility of a hike (next time). There is the possibility of a pause. It’s a decisive maybe,” ECB President Christine Lagarde said on Thursday in comments that sent the euro 1% lower on Thursday.

During Asian trade on Friday, the single currency eased 0.14% to $1.0958.

Meeting on Wednesday, the Fed left the door open to more rate hikes, though Fed Chair Jerome Powell gave few hints about the September meeting.

“Both central banks have retained a hawkish bias, but the Fed looks more likely to hike again while the data is telling us the ECB is probably done,” said Rodrigo Catril, senior currency strategist at National Australia Bank (OTC:).

Data overnight underscored the challenge faced by the Fed, with the U.S. economy growing faster than expected in the second quarter as labour market resilience underpinned consumer spending, while businesses boosted investment in equipment.

A separate report from the Labor Department showed initial claims for state unemployment benefits fell 7,000 to a seasonally adjusted 221,000 for the week ended July 22, the lowest level since February. Economists had forecast 235,000 claims.

Against a basket of currencies, the dollar was up 0.108% at 101.780, having risen 0.66% overnight.

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