Global policymakers are grappling with erratic pricing pressures from the six-month-long U.S.-Israeli war on Iran that has pushed oil prices well above $100 per barrel and upended the path for rates amid bouts of selloffs in long-end bonds.
The European Central Bank raised rates last week and warned of further hikes, setting the stage for the Fed policy decision on Wednesday and a widely expected rate hike from the BOJ on Friday. The Bank of England is expected to stand pat on Thursday, but the voting is likely to be close.
Traders ramped up bets for a Fed rate hike after data on Friday showed U.S. consumer prices accelerated in August; they priced in an 86% chance of an increase this week and another move higher later in the year, the CME FedWatch tool showed.
“The Fed could decide to wait, but that is complicated by its October meeting being just ahead of the U.S. midterm elections and waiting until December to move will be too long,” said Shane Oliver, chief economist and head of investment strategy at AMP.
The euro was recently at $1.159, while sterling last bought $1.3524. The U.S. dollar index, which measures the greenback against six other units, was steady at 99.15 after two straight weeks of meager declines.
U.S. Treasury yields remained near multi-year highs, with the 2-year yield , which typically moves in step with Fed rate expectations, easing a touch to 4.6148%, after rising 26 basis points last week.The rising yields and shifting rate expectations have so far failed to push the dollar higher as central banks in major economies are also expected to raise rates while worries around Fed policy credibility linger.
“We think the dollar would welcome a hike in that it would back up the Fed’s monetary policy credibility and take a little more steam out of the debasement trade,” ING analysts said in a note.
“Yet the dollar does not need to rally too far. After all, we think this is a recalibration of Fed policy, not a new cycle.”
Meanwhile, Brent crude futures rose nearly 3% to $107.51 per barrel in early Asian trading after new Houthi strikes on Saudi Arabia and Iranian attacks on ships in the Gulf compounded supply concerns following the closure of a key Saudi oil pipeline.
RISING YEN FACES BOJ RECKONING
The Japanese yen was at 153.49 per U.S. dollar, not far from the seven-month high of 152.89 it touched last week as fresh signs emerged of market sentiment on the Asian currency changing, with speculators turning to a net long position on the yen for the first time since February.
“A 25 bps hike is already almost fully priced,” analysts at MUFG said in a note. “For the yen to strengthen further, the BOJ will have to signal that they are planning to stick to the faster pace of hikes.”
TD Securities analysts said not putting another rate hike on the table for either the October or December meeting risks a knee-jerk dollar/yen rally back to 157 to 160.
The yen is up 4% this month on the back of expectations that the BOJ will be faster in delivering rate hikes and signs of potential repatriation of assets by domestic investors.
“Not hiking would be a catastrophic error. Not communicating robustly will be a significant own goal,” said James Athey, fixed-income portfolio manager at Marlborough, adding that expectations about repatriation and GPIF asset allocation changes are playing a significant role in the yen move.
