Eyes on Japan as yen flirts with ¥‎100/dollar

epa05385297 Foreign currency exchanges are seen displayed on a board in Sydney, New South Wales, Australia, 23 June 2016, as Britain heads to the polls to vote on whether to exit the European Union (EU), commonly abbreviated as 'Brexit' (British exit), analysts are tipping both the Euro and the Pound Sterling will fall if the vote to exit succeeds. EPA/DAN HIMBRECHTS AUSTRALIA AND NEW ZEALAND OUT©EPA

Wednesday 05:05 BST. All eyes were back on Japan after its currency spiked above ¥‎100 per dollar overnight and muted US inflation data cast further doubt on the prospect of the Federal Reserve raising interest rates by the end of the year.

In Asian trading the yen retreated 0.3 per cent to ¥‎100.63 per dollar, having firmed 0.9 per cent on Tuesday to ¥99.54, its strongest since June 24 in the aftermath of the UK’s vote to leave the EU.

That prompted Japanese government officials to warn that they were “closely watching FX markets with a sense of urgency”.

The Japanese stock market was proving resilient despite the overall strength in the currency and its potential pain for exporters, with the broad Topix up 0.6 per cent and the Nikkei 225 gaining 0.7 per cent. Stocks sold off on Tuesday as the yen rose in the afternoon session.

Australia’s S&P/ASX 200 was down 0.1 per cent, while Hong Kong’s Hang Seng rose 0.2 per cent. That came after the S&P 500 closed 0.6 per cent lower as all three major US equities gauges pulled back from record highs.

On the mainland, China’s Shanghai Composite was off 0.2 per cent while the tech-focused Shenzhen Composite rose 0.3 per cent, following Beijing’s approval on Tuesday night of the long-awaited stock trading link between Shenzhen and Hong Kong. The move, which comes roughly two years after a tie-up between the territory and the Shanghai Exchange, will allow foreign companies to trade shares in some of China’s most sought-after tech groups and start-ups.

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Driving moves in currency markets has been a weaker US dollar, which has been under pressure as investors scale back rate-rise expectations. The odds of the Fed raising rates in September took a knock on Tuesday after consumer prices rose just 0.1 per cent month-on-month in July — though William Dudley, president of the New York Fed, maintained that a rate rise next month was still possible.

As such, the minutes from the Federal Reserve’s most recent policy meeting, to be released later on Wednesday, will be read closely for any hints on the pace and direction of monetary policy.

The dollar index, a measure of the US currency against a basket of global peers, was up 0.1 per cent at 94.861, after falling 0.9 per cent the previous session in response to the soft inflation data. Weak retail sales data this week have also undermined the odds of a near-term rise in interest rates, with the probability of a 25 basis point rate rise by the Fed next month falling to 22 per cent from 24 per cent a week ago, according to market pricing tracked by Bloomberg.

However, Mr Dudley’s comments helped markets push the probability of a December rate rise up to 51 per cent from 44.9 per cent a week ago, prompting a sell-off in US Treasuries.

In Asia, government bond yields (which move inversely to prices) were also edging higher, with the yield on the benchmark 10-year Japanese government bond up 0.7 basis point to minus 0.078 per cent, and the yield on the 10-year Australian bond up 2.5bps at 1.902 per cent.

Gold, which is sensitive to interest rate expectations, slipped 0.1 per cent to $ 1,344.45 an ounce.

With the yen on the rise, investors are beginning to look ahead to the Bank of Japan’s September meeting. Pressure is mounting on the central bank to take further action, with the BoJ having delivered only mild policy easing in July and announcing a “comprehensive assessment” of its policies.

In its recent survey of fund managers, Bank of America Merrill Lynch found that only 13 per cent of global investors think the BoJ and European Central Bank will eliminate negative rates over the next year, while 39 per cent reckon a policy of helicopter money will be adopted by a major central bank.

“We expect the BoJ to strengthen the sustainability of its monetary policy rather than simply expand the existing easing programme,” said Shusuke Yamada, BAML strategist.

Asian currencies were lower across the board, with the New Zealand dollar down 0.3 per cent against its US counterpart in spite of encouraging jobs data. The Australian dollar was 0.3 per cent lower, too, as Moody’s affirmed its triple A credit rating on the country and data showed national wages tracked sideways in the June quarter.

Oil prices were declining after four straight days of gains. Brent crude, the international benchmark, was down 0.7 per cent at $ 48.90 a barrel while West Texas Intermediate was down 0.5 per cent. Prices have been buoyed in recent days sessions by hopes of Opec members may reach agreement on an output freeze at an informal gathering next month.

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