Fragile yen on tenterhooks ahead of BOJ

SINGAPORE: The yen was pinned near recent lows on Friday while traders waited to see whether the Bank of Japan can convince the market it can keep hiking interest rates into next year, while the euro slipped a bit after the central bank didn’t hint at rate hikes.

A dollar bought 155.59 yen early in the Asia morning, not too far from the yen’s 10-month trough of 157.90 made in November, as markets fretted about Japan’s fiscal position and that policymakers were behind the curve in raising rates.

Investors are now all but sure Japan’s central bank will hike its short-term rate by 25 basis points to 0.75% later in the day, following hints from Governor Kazuo Ueda in a speech earlier this month - meaning market moves will depend on his tone and the outlook.

Sources have told Reuters the BOJ will not publish updated findings of its neutral rate estimate, or use it as a key communication tool, relying on Ueda’s press conference at 0630 GMT to lay out the interest rate path.

“We expect a hike, long overdue based on fundamentals. But we don’t expect this move to spark a rally in the yen,” said Yuxuan Tang, global market strategist at J.P. Morgan Private Bank.

“The messaging from authorities will likely signal that the next move is some distance away. A surprise hold, however, could see USDJPY spike sharply. In that scenario, authorities might face a market confidence crisis and be forced into direct interventions to stabilise the currency.”

Euro dips as lagarde rebuffs hawks

Overnight the dollar had briefly weakened following a sharp and unexpected fall in U.S. inflation, but investors weren’t sure how far to trust the data since collection was interrupted by the U.S. government shutdown, and the move soon retraced.

Sterling round-tripped to sit at $1.3392 after the Bank of England cut interest rates to 3.75%, as expected, but the decision was closer-run than the market had anticipated which may limit the room for further easing.

The euro dipped about 0.1% overnight and traded at $1.1724 in Asia, weighed down because European Central Bank chief Christine Lagarde offered no forward guidance and said all options were on the table, pushing back against more hawkish members.

“In recent weeks, hawkish commentary from ECB Executive Board Member Schnabel had driven a shift in the market’s assessment of the risks to policy moving forward,” ANZ analysts said in a note to clients. “But (the) balanced tone signals Schnabel’s view that the next move is more likely to be a hike is not broadly shared across the council.”

The ECB left its policy rate on hold at 2%, as expected.

Hold on

Norway’s crown rose slightly to 10.15 per dollar after the central bank left rates on hold at 4% and indicated it was in no hurry to cut. There wasn’t much movement in the Swedish crown after rates were left on hold, as expected.

The Australian and New Zealand dollars were broadly steady at $0.6614 and $0.5770 respectively.

China’s yuan was firm in offshore trade, having hit an almost 15-month top of 7.031 per dollar overnight, while South Korea’s won has been under sustained selling pressure and was wobbly at 1477 per dollar in morning trade.

Bitcoin is pinned below $90,000 and was steady at $85,500.