By Ankur Banerjee
SINGAPORE, Feb 16 (Reuters) – The Japanese yen dipped on Monday after strong gains last week on easing fiscal worries while the U.S. dollar was steady as soft inflation data bolstered the case for interest rate cuts from the Federal Reserve later this year.
Liquidity is likely to be thin with markets in the U.S., China, Taiwan and South Korea closed for holidays.
The yen eased 0.3% to 153.15 per U.S. dollar on Monday after climbing nearly 3% last week – its biggest weekly jump in about 15 months – after Prime Minister Sanae Takaichi’s Liberal Democratic Party won a landslide election victory.
Bank of Japan Governor Kazuo Ueda and Takaichi will hold their first bilateral meeting since the election later on Monday to discuss the economy and monetary policy.
“While many thought a supermajority for her LDP party would be negative for Japanese bonds and the yen, the exact opposite happened: They both rallied,” said Brent Donnelly, a currency trader and founder of analytics firm Spectra Markets.
“The removal of uncertainty has encouraged long-term investors to dip their toes back in the water. With a bit of stability, those juicier Japanese yields are attracting plenty of interest. So are the Nikkei and the yen,” he said. “It’s called the ‘Buy Japan’ trade.”
Data on Monday though laid bare some of the challenges facing Takaichi and her government with Japan’s economy barely growing last quarter, eking out an annualised 0.2% expansion.
That may complicate the path for Bank of Japan tightening.
The BOJ next meets on rates in March, with traders ascribing 20% odds for a hike. Economists polled by Reuters last month expected the central bank to wait until July before tightening policy again.
The BOJ lifted the key rate to a 30-year high of 0.75% in December, although that remains well below most major economies, leading to significant yen underperformance that triggered bouts of direct intervention to support the currency over the past few years.
Goldman strategists said a return to yen weakening and volatility in long-end bonds is likely to follow if the BOJ were to use recent yen strength to stay on a more gradual tightening path. Goldman’s 12-month forecast for the yen is 152 per dollar.
FED RATE CUT WAGERS
Meanwhile, data on Friday showed U.S. consumer prices increased less than expected in January, giving the Fed additional leeway for policy easing.
“The markets are flirting with pricing in a third cut,” said Kyle Rodda, senior financial analyst at Capital.com.
Futures imply 62 basis points of easing over the rest of this year. The next cut is likely in June, with markets assigning 68% odds to a reduction.
The euro traded little changed at $1.1863, while sterling eased slightly to $1.36395.
The U.S. dollar index, which measures the currency against six major peers, was steady at 96.973 after dropping 0.8% last week.
Much of the action after the inflation data was in the bond market. The U.S. two-year Treasury yield , which reflects Fed policy expectations, closed at its lowest level since 2022 on Friday, while the 10-year yield fell 4.8 basis points. [US/]
Meanwhile, the Swiss franc was a touch softer at 0.7686 per U.S. dollar after gaining more than 1% last week, with investors increasingly wary of intervention from the Swiss National Bank to curb strength in the traditional safe haven.
“Further Swiss franc gains raise the risk of additional downside surprises relative to the SNB’s inflation forecasts,” said OCBC strategists in a note.
“This could potentially challenge the SNB’s recent tolerance for currency appreciation, even if the bar for returning to negative rates remains high.”
The Australian dollar firmed 0.2% $0.70865, hanging just below the three-year high it scaled last week, while the New Zealand dollar was 0.1% weaker at $0.6033 ahead of the Reserve Bank of New Zealand’s policy meeting on Wednesday. The central bank is widely expected to hold rates steady.
(Reporting by Ankur Banerjee in Singapore; Editing by Kevin Buckland)
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