Yen Strength Returns as Central Bank Meetings Spur Risk Aversion

  • Markets await clues from Fed, BOJ on monetary policy paths
  • Japan's currency near seven-week high against the euro

The yen held gains as investors opted for its relative safety before the Federal Reserve and the Bank of Japan announce monetary policy decisions in coming days.

Japan’s currency was little changed against the dollar after gaining the past two days as stocks fell before Fed officials conclude their meeting Wednesday in Washington. The yen touched its strongest level in seven weeks versus the euro on Tuesday before the BOJ’s latest policy announcement, due Oct. 30. Currencies from commodity-exporting nations declined after oil fell to the lowest closing price in two months.

“Financial markets are getting more cautious,” Georgette Boele, a currency strategist at ABN Amro Bank NV in Amsterdam, said by e-mail. “It’s a bit of silence before the storm.”

The yen was at 120.41 per dollar as of 8:50 a.m. Tokyo time, after rising 0.5 percent to 120.46 Tuesday. The Japanese currency appreciated 0.1 percent to 132.90 per euro, having reached 132.73 in the previous session, its strongest level since Sept. 7.

Norway’s krone weakened against all of its 16 major peers. The currency of Europe’s biggest crude producer slid 0.2 percent to 8.4689 per dollar after dropping 1.4 percent Tuesday. Australia’s currency declined 0.1 percent to 71.89 U.S. cents.

Policy Drivers

“Before the central bank decisions this week starting with the Fed, to the BOJ on Friday, there is some cautious positioning,” said Esther Reichelt, a currency strategist at Commerzbank AG in Frankfurt. “In general this move is driven by underlying risk sentiment.”

The BOJ is expected to stand pat on its stimulus plan at this week’s meeting. Sixteen of 36 analysts surveyed by Bloomberg said they expect further easing by the BOJ on Friday, while eight forecast further easing at a later date and 12 see no prospect of any change in the foreseeable future.

For Japan, receding expectations that the BOJ will add stimulus this week were also behind the yen’s strength, said Koji Fukaya, the Tokyo-based chief executive officer at FPG Securities Co.

Further Easing

The euro dropped 1.4 percent against the yen on Oct. 22, its steepest decline since March, after European Central Bank President Mario Draghi indicated officials would announce further policy easing measures at their December meeting.

“Japan will definitely not be happy with moves in euro-yen following the ECB meeting,” Reichelt said. “This is clearly a point that speaks in favor of extension of Japanese monetary policy” which is still a possibility this week, she said.

As Fed officials debate when to tighten policy, the recent turmoil in emerging markets has prompted investors to pare back prospects of an increase in U.S. interest rates this year.

Futures markets show a 33 percent chance of the Fed raising rates by its meeting in December, down from the 64 percent signaled on Sept. 16. They indicate almost no chance of a move at this week’s gathering. The calculations are based on the assumption the effective fed funds rate will average 0.375 percent after liftoff, compared with the current range of zero to 0.25 percent.

Before it's here, it's on the Bloomberg Terminal.