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22.09.2022: JPY drifts lower following BoJ intervention; outlook for USDX, USD/JPY, AUD/USD

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As widely expected, the Fed raised the interest rate by 75 basis points for the third time in a row. Traders have already priced in such an increase.

If so, the question is why the market reaction has been so strong. For instance, the NASDAQ, which is vulnerable to risk sentiment, dived down to new lows. The reason is that the Fed has made clear hints about further rate hikes. Moreover, it could start tightening monetary policy at a faster pace than previously expected.

The dot plot suggests that the watchdog will raise interest rates as high as 4.4% by the end of 2022. It means that the regulator is likely to hike rates by at least 1.25 percentage points in its two remaining meetings.

In his speech yesterday, Jerome Powell also left no room for discussion, confirming more sharp rate hikes ahead. At the press conference, he said that the Fed is strongly committed to a hawkish stance and plans he voiced at the Jackson Hole Symposium.

Now, the Fed’s top priority is to cap soaring inflation. Policymakers should see more signs of its slowdown to the 2% target. Only then, at some point, it will be appropriate to consider a softer stance.

“The historical record cautions strongly against prematurely loosening policy. We will keep raising rates until we are confident the job is done,” Powell stated. Despite the risks of a recession, the Fed is committed to bringing inflation under control as higher inflation could inflict greater economic pain.

The US dollar jumped to 111.79 for the first time since mid-2002 following remarks of Fed policymakers. Apart from the Fed’s ultra-hawkish stance, it is up amid geopolitical tensions fueled by Vladimir Putin’s recent announcement.

However, in the last hours of the Asian session, the US dollar index slipped to 110.80 versus its main rivals. It is still moving in the downward channel of 110.88-111.81. We will tell you about the reasons for such a sharp reversal later in our review.

The US currency is highly likely to consolidate at 2020 highs in the short term against the euro and the pound sterling, the Australian and New Zealand dollars. At the same time, it is hard to predict its future trajectory versus the yen.

The yen has been hurt the most by a rapid rally of the greenback. As a result, it reached a 24-year low. It was depreciating against the backdrop of a widening rate gap between the Fed and the BoJ.

Following yesterday's aggressive rate increase by the Fed, the Bank of Japan decided to maintain its ultra-loose monetary policy. It kept unchanged its -0.1% target for short-term interest rates and 0% for the 10-year government bond yield. The regulator is unlikely to adjust monetary policy until it sees a steady increase in nominal wages.

What is more, Vice Minister of Finance Masato Kanda said that the BoJ had not intervened in the currency market. "There are cases where we could conduct stealth intervention. We haven't intervened yet, but we're ready to take action any time," he said

And this moment has come. After the yen rose above the threshold of 145, the BoJ intervened in the foreign exchange market.

It occurred for the first time since 1998 when the yen touched 147.60. The regulator took such a decisive step a few hours after the meeting.

"We have taken decisive action," Masato Kanda told reporters. This move aims to support the weak yen and stimulate economic growth amid soaring inflation worldwide and a shift to aggressive tightening.

Following the intervention, the yen approached 142.54. The dollar/yen pair was moving in the range of 142.46-145.90. The yen may regain ground as a safe-haven currency amid geopolitical woes.

A massive sell-off in stock markets was triggered by risk aversion. It also dragged commodity currencies down. The Aussie dropped to 0.6583, the lowest level since mid-2020.

In the Asian session, the AUD/USD pair was trading at 0.6660. The pair also changed its trajectory following the strengthening of the yen. It is now hovering in the price corridor of 0.6574-0.6670 amid a drop in the greenback.

Today is the Day of Mourning in Australia and trading floors are closed. Therefore, trading volumes may be low.


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00:00 INTRO
00:21 NASDAQ
02:19 USDX
04:28 USD/JPY
05:27 AUD/USD
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