BOJ Rate Hike Looms: Can Yen Sustain Gains?

The Bank of Japan (BOJ) is expected to raise interest rates next week, but it's unclear if the Japanese yen will maintain its recent gains. Market participants assign a ~79% probability to a 25 bps rate hike in September, up from ~75% last week.

BOJ policymakers have hinted at further rate hikes, with Governor Ueda stating that they will assess inflation and economic developments before making a decision. Board member Hajime Takata has been even more explicit, arguing for more timely rate hikes.

The joint intervention by the US and Japan to defend the yen currency may have contributed to its recent rally, but it's uncertain if this trend will continue. A simple rate hike decision next week may lead to a 'buy the rumour, sell the fact' response, with traders pricing in another 25 bps rate hike for January next year.

The BOJ's policy normalization story is expected to be reinforced by a September hike, but this may not be enough to sustain further gains in the yen. The bigger trigger would be whether the BOJ convinces markets that moving to 1.25% next week is part of a continuing hiking cycle or just another cautious pause point.

From a technical perspective, USD/JPY has already moved down significantly since last week, dropping from 160.00 to near 153.00 now. The key line in the sand to watch out for is around 152.00-25, with eyes on the January and February lows.