Yen Advances as Traders Seek Safety After Risk Markets’ Rout

Balancing Market Realities With Fed Expectations
  • Currency extends gains after Fed’s Brainard urges prudence
  • Japan’s central bank meets later this month on monetary policy

The yen gained against its major peers as traders remained on edge following last week’s global selloff in stocks and commodities.

Japan’s currency extended gains against the dollar after Federal Reserve Governor Lael Brainard said the case for the central bank to raise rates is "less compelling." The move comes as foreign-exchange managers scrutinize prospects for the Bank of Japan’s Sept. 21 policy meeting after hopes for additional easing were dashed in July, causing the yen to strengthen.

The yen has unexpectedly strengthened this year as traders flocked to the currency after Britain’s vote to leave the European Union and on disappointment with the Bank of Japan’s inability to generate inflation. Japan’s currency is often favored in times of market upset because of Japan’s current-account surplus and stable financial system.

"In the near-term, yen momentum will depend on the Bank of Japan’s meeting, with expectations low for the Fed to move," said Eric Viloria, a currency strategist at Wells Fargo Securities LLC in New York. "Global equity markets are lower overall and that tends to be supportive for the yen."

Viloria predicts the yen will weaken to 103 per dollar by year-end.

The yen advanced 0.8 percent to 101.85 per dollar as of 5 p.m. in New York, after falling almost 1 percent over the previous two trading sessions. It added 0.8 percent to 114.43 per euro. 

Stocks and commodities tumbled last week, though U.S. shares rebounded Monday. Brainard’s comments were the last before the Fed enters its quiet period, during which officials abstain from publicly speaking about monetary policy in the run-up to a policy meeting.

"You have foreign assets coming back to Japan in support of the Japanese yen," said Hans Redeker, Morgan Stanley’s chief global currency strategist in London. "There’s a sea-change taking place in the bond market. That has a spill-over effect."

Redeker expects the yen the strengthen to 99 per dollar by year-end.

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