Currencies Weak as Markets Reel on Fed Interest Rate Cut By Reuters

SINGAPORE (Reuters) – The yen hovered around year-highs on Monday, trading weighed down by a holiday in Japan as market participants vacillated over the expected size of the Federal Reserve’s near-certain rate cut to the end of this week.

Trading in Asia was slow, with markets in Japan, China and South Korea closed for holidays.

The dollar was steady at 140.86 yen, close to where it finished last week and close to the late-December low of 140.285 it hit on Friday. It fell 1.3% against the yen last week.

The September 17-18 Fed meeting is the culmination of a busy week, with the Bank of England and Bank of Japan announcing policy decisions on Thursday and Friday.

Treasury yields have fallen in the run-up to the much-anticipated meeting, particularly as rates rise for the Fed to get aggressive with a half-point rate cut.

Benchmark 10-year yields were last at 3.65 percent, unchanged from Friday. Those yields fell 30 basis points in about two weeks. Two-year yields, more closely tied to expectations of monetary policy, were at 3.57 percent, down from about 3.94 percent two weeks ago.

Selling the dollar for the yen was the cleanest trade for investors looking to play falling Treasury yields, said Chris Weston, head of research at Australian online broker Pepperstone.

“While speculators are short and going this low, this trend is clearly one to align with,” and the December lows for the dollar-yen pair are one to watch, he said.

A quarter-point cut by the Fed as interest rate cuts begin is still seen as the slightly more likely outcome, but only marginally so.

Fed speakers and data releases over the past month had markets shifting the odds around the size of this week’s rate cut, debating whether the Fed will fend off weakness in the labor market by cutting aggressively or take a slower wait-and-see approach.

According to CME FedWatch, Fed funds futures reflect that traders have a 52% chance of a 50 basis point cut at the September meeting. Futures are pricing in a total of 125 basis points of rate cuts in 2024.

Investors are also eyeing the Bank of Japan’s interest rate decision on Friday, when it is expected to keep its short-term policy rate target steady at 0.25 percent.

BOJ board members have indicated they are eager to see higher rates, and the narrow gap between rates in Japan and other major currencies has pushed the yen higher and made billions of dollars worth of yen-financed transportation operations cancelled.

Japan is also set to see a change in political leadership as the ruling Liberal Democratic Party is set to hold elections on September 27 to choose a leader to replace Prime Minister Fumio Kishida.

Sanae Takaichi, one of the leading contenders to replace Kishida, said on Friday that the Bank of Japan should hold off on further interest rate hikes to keep the country’s economic recovery intact.

Sterling edged up 0.05% to $1.3132, still weaker than one-week highs hit on Friday. The euro rose 0.11% to $1.1088. It was 0.1% lower at 101.

The European Central Bank cut interest rates by 25 bps last week, but ECB President Christine Lagarde played down expectations of a further cut in borrowing costs next month.

ECB Chief Economist Philip R. Lane and Vice President Luis de Guindos speak at Monday’s events.

The Bank of England is expected to hold its key interest rate at 5% next week after starting easing with a 25bp cut in August.

Bank of Canada Governor Tiff Macklem has meanwhile opened the door to accelerating the pace of interest rate cuts, the Financial Times reported on Sunday. The BoC, after holding its key policy rate at 5 percent, a high in more than two decades, for a year has cut it by a quarter of a point three times in a row since June.