The FX Trader: Rising BoJ rate hike odds – so what?

The JPY put in a modest rally – if rather sharp in USDJPY, on Bank of Japan governor Ueda comments Monday making it far clearer that a BoJ hike at the December 19 meeting is far more likely. One reason the JPY rally isn’t sticking is that this is mostly about moving forward what was thought likely to be a December or January hike, not shifting the entire front end of the yield curve higher. We are still only priced for two total hikes through the September 2026 BoJ meeting. Another reason that the JPY rally reversed was likely on the significant jump in global yields Monday, with European and especially US rates jolting higher. It seems unlikely the BoJ can provide enough hawkishness to turn the JPY: it has only been JPY downside pressure itself that is providing the modest urgency to respond at the margin by bringing the next rate hike forward. Still, Japan’s latest 10-year bond auction did see strong demand, helping to cap 10-year JGB’s after new post-GFC highs earlier in Tuesday’s session. The lesson in microcosm is that if long Japanese yields rise, the market plays it as JPY negative, anticipating that it brings forward the moment when the BoJ has to take the next JPY-negative step like yield-curve-control and with the MoF and Takaichi government proving negligent by failing to bring fiscal austerity to bear.

Elsewhere, if global yields rise in the rest of the world, Japan remains theoretically first in line to defend its bond market from further pressure, which then means the pressure is transmitted to the currency. The only new developments that will change the dynamic are 1) a change in that mentality because this is eventually the same issue that Europe and the US will face 2) a collapse in long bond yields globally, which seems tough to come by without a trainwreck in risk sentiment and maybe not even then. And then there is the longer term of 3) an entirely different playbook of capital controls and forcing more Japanese savers to repatriate their savings.

Yes, further JPY downside pressure will be countered by the BoJ and MoF with verbal intervention and marginal hawkishness on monetary policy and maybe even direct intervention, but preventing further weakness is a far cry from supporting the currency with stronger medicine.

Ex-JPY, volatility is low in the major currencies as USD lacks direction, though tilting. The US dollar is sending few clues, a bit on the weak side with an effort at 1.1650+ resistance in EURUSD rebuffed as 1-month implied volatility in EURUSD eyes the lows since September below 5.50%. At this point, with a more clearly defined zone of resistance in EURUSD and elsewhere, we’re closer to a technical breakdown if some catalyst takes us there. Wednesday we get the November ADP payrolls and ISM Services, where sufficiently negative news might put a break in play.

The sell-off on Monday did reverse the recent sprint higher once 155.00 properly gave way a couple of weeks back, theoretically even confirming a reversal of the ascending wedge (red lines) blow-off top. Still, the bears have a lot of work to do to suggest this was more than a mere pullback with a large up-trend. A close back down through the 155.00 area would be a start, but the bigger levels are lower still into154.50 and even 153.00. On the flipside, bulls will see any strong close Tuesday as a bullish reversal.