October 22 Market Note: 'Even as US interest rates fell, the dollar-yen decline did not continue'

Dollar-yen movements from the previous day

On October 21, the dollar-yen opened near 158.29 yen, rose to around 158.39 yen, and then fell to around 157.84 yen. The closing price was near 158.11 yen, a slight dollar depreciation and yen appreciation from the previous day. In the United States, the weakness of housing-related indicators was noted, and long-term US interest rates declined. On the other hand, US stocks rose due to expectations for corporate earnings, providing factors that supported investor sentiment. In the crude oil market, supply concerns surrounding the situation in the Middle East remain, and geopolitical news is also making it difficult for the market to judge. For the dollar-yen, it was a day where it was difficult to align the direction, as the decline in US interest rates tends to lead to dollar selling, while the sense of security from rising stock prices could support the market.

However, what caught my attention was not that the dollar-yen fell, but that it returned to the 158 yen range after falling to the latter half of the 157 yen range. Some might think that if US interest rates fell, it would not be strange for the dollar-yen to fall further. Why, then, did the decline not proceed in one direction? Is the market downplaying changes in interest rates? Or are factors other than interest rates supporting the dollar-yen?

Circumstances on the yen side that cannot be explained by interest rate differentials alone

A decline in US interest rates tends to lead to the view that the interest rate differential between Japan and the US will narrow, which is generally a factor pushing down the dollar-yen. Furthermore, on the 21st, Bank of Japan Deputy Governor Himino showed a positive stance toward interest rate hikes, based on factors such as the underlying inflation rate approaching the 2% target. If expectations for additional interest rate hikes by the Bank of Japan strengthen, a reason to buy the yen will also emerge. Even so, the decline in the dollar-yen was limited.

It is too early to conclude from this that ‘the market ignored the Bank of Japan’s remarks.’ Even if the possibility of an interest rate hike is recognized, when and to what extent an interest rate hike will actually be implemented is another matter. Both the decline in US interest rates and the strengthening of expectations for a Bank of Japan interest rate hike are factors for yen appreciation, but the reaction changes depending on how much the market has priced these into future prices. Unless we look at whether yen buying continues after the moment the news emerges, not just the price movement at the moment it appears, we cannot know whether the evaluation has changed.

Also, the rise in US stocks cannot be ignored. If investor caution is eased by rising stock prices, the movement to buy the yen as a safe asset may weaken. Of course, it cannot be concluded that yen selling occurred solely due to rising stock prices, but the dollar-yen is influenced not only by US interest rates but also by the sense of security in the stock market and policy outlooks on the Japanese side. The market on the 21st seems to have shown that even if there are factors for dollar selling, that alone does not determine all price movements.

What I want to confirm today is whether yen-buying factors remain in the price movements

In today’s market, I would like to use the previous day’s low of around 157.84 yen and the previous day’s high of around 158.40 yen as benchmarks for observing price movements. If it falls below the low but returns immediately, it does not necessarily mean that the movement to sell the dollar is strengthening in one direction. Conversely, if the return is sluggish even after falling below the low, and the decline in US interest rates and expectations for Bank of Japan interest rate hikes continue to be recognized, there is a possibility that the view toward yen appreciation is spreading.

Another thing I want to watch is the reaction to remarks by Bank of Japan officials. Does the yen not appreciate even if there are remarks positive toward additional interest rate hikes, or does yen buying continue triggered by the remarks? This difference is a clue to thinking about whether participants have already priced in the possibility of an interest rate hike or have not yet fully evaluated it. However, one cannot judge the entire market’s view based on a single remark and a single price movement.

For me, today, rather than deciding the direction of the dollar-yen first, I will confirm whether US interest rates and the dollar-yen move in the same direction or show separate movements. If interest rates fall and the dollar-yen also falls, it becomes easier to think that the reaction conscious of the conventional interest rate differential is continuing. On the other hand, if the dollar-yen does not fall even if US interest rates fall, or if yen buying does not continue after the Bank of Japan’s remarks, other factors may be supporting the market. Price movements do not just tell us the simple direction of rise or fall. What does the market accept as a factor, and to what extent is it reflected in buying and selling? I want to watch those changes.

Today’s takeaway

The emergence of yen-buying factors and the continuation of a trend of buying the yen are not the same thing. I want to see through to the price movements after the factors emerge.