The Japanese yen is trading at a four-decade low against the US dollar, reflecting the growing divergence in the monetary policy outlook for the two central banks. Traders now see an 80% probability that the Federal Reserve will raise interest rates at least once this year, marking a sharp shift from the pre-Iran war expectation of two rate cuts. At the same time, the Bank of Japan is seen as less committed to further monetary tightening. Despite this month's 25 basis point increase, which took its policy rate to 1%, interest rates in Japan remain well below the estimated neutral rate of around 2%. Moreover, only one BoJ policymaker has openly advocated further rate hikes, while the government continues to favour low borrowing costs, adding to the headwinds facing the yen. Against this backdrop, Japanese officials have warned that intervention to support the currency remains a possibility. While such a move could temporarily reverse some of the yen's recent losses, it would do little to address the underlying divergence in market expectations for monetary policy in the two countries.
Ricardo Evangelista, ActivTrades
Source: ActivTrader
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