BoJ Tightening Expectations Boost Japanese Yen

According to Scotiabank strategists Shaun Osborne and Eric Theoret, Japan's inflation data is supporting expectations for the Bank of Japan (BoJ) to tighten monetary policy. In July, the country's Consumer Price Index (CPI) rose to 1.9% in the year, matching forecasts. Additionally, preliminary August Purchasing Managers' Index (PMI) data showed stronger-than-expected results in services and manufacturing.

The BoJ tightening expectations have led to a modest decline in the USD/JPY exchange rate, with the Japanese Yen gaining 0.4% against the soft US dollar. The strategists describe the technical setup as neutral to bearish, with losses below 158.25 seen as opening further downside for the USD.

Osborne and Theoret point out that about 20 basis points of hikes are already priced in swaps, indicating a shift in market expectations. They also note that while the USD has been experiencing losses, it has drawn support in the past but this week's conviction is lacking.