Yen extends surge, Oil slips despite tensions, stocks rebound

Yen catches a rare bid as BoJ-Fed expectations diverge

The Japanese yen is extending its rally on Thursday, gaining broadly across the FX spectrum following the latest hawkish rhetoric from Bank of Japan policymakers. Both BoJ Governor Kazuo Ueda and his deputy Ryozo Himino put a September rate hike firmly on the table, but it was board member Hajime Takata’s comments that caught investors’ attention the most.

Takata, a known hawk, suggested that a rate increase greater than 25 basis points is a possibility, as is a back-to-back hike. BoJ tightening expectations have been slowly gathering pace after Prime Minister Sanae Takaichi was forced to back faster rate hikes amid a plunging currency and pressure from the US administration.

Investors now put the odds of a September move at 77%, with almost 100 bps of increases to follow after that. In contrast, a Fed hike this month is only 59% priced in, with only one follow-up move expected in 2027.

Dollar retreats as yen and gold advance

The US dollar is down about 1% to 157.14 yen today, while the New Zealand dollar stands out as being the biggest loser, tumbling 1.3% against the yen. Yen strength comes even as Japanese government bond yields take a dive, with the 30-year yield falling by more than 2% today. The US 30-year yield, on the other hand, is down by less than 0.5%.

But on the whole, there is relief in Treasury markets following soothing comments by New York Fed President John Williams. Speaking to CNBC yesterday, Williams attributed the rise in Treasury yields in “large part” to the strong US economy. On inflation, Williams remains one of the more dovish FOMC members and didn’t sound too worried, saying that more data is needed before concluding whether “monetary policy currently is sufficient”.

However, Fed funds futures didn’t budge much and the dollar’s pullback is mostly being driven by the stronger yen. Nevertheless, gold is capitalizing on the softer greenback as well as the drop in bond yields, gaining more than 1% today to climb to $4,437.

Waller and NFP report awaited

Whether this trend in dollar/yen and yields holds or not largely depends on any final comments later in the session by Fed Governor Christopher Waller on the inflation outlook before the blackout period starts this weekend ahead of the September meeting, as well as of course by tomorrow’s jobs report for August. The ISM services PMI due later today will be watched too.

With the latest Japanese data backing the case for a September BoJ hike and US data supporting a wait-and-see stance by the Fed, this is a rare moment of policy divergence favouring the yen rather than the dollar.

Oil see-saws on Trump’s Iran commentary

Further weighing on the greenback is some optimism that this week’s escalation in the Middle East won’t continue for much longer. In comments to reporters on Wednesday, President Trump said he didn’t think the military strikes on Iran will last “too long” and he also raised hopes that the war won’t be “very much longer” either.

More interestingly, the Wall Street Journal is reporting that Trump is privately considering declaring an end to the conflict. Yet, the Pentagon has just extended the deployment of 50,000 US troops into 2027, suggesting that even if the war ends, the Strait of Hormuz is likely to remain a danger zone for some time.

This probably explains oil’s only modest losses earlier in the day before edging higher again. WTI futures have climbed back above $91 a barrel after briefly dropping below $90.

Modest risk appetite

Still, hopes that the bombings in the Middle East may end soon and the decline in government borrowing costs have helped lift the mood somewhat in equity markets. Wall Street ended higher on Wednesday, snapping three days of losses. E-mini futures are modestly higher today, while it’s a fairly mixed picture in Europe and Asia.

AI infrastructure and chip marker, Broadcom, failed to boost markets with its robust earnings yesterday. Despite the company strongly beating expectations, investors were disappointed by its guidance for the current quarter, sending its shares sharply lower in after-hours trading before recovering slightly.