Japanese Yen: Pumped Up by Growing Expectations of BoJ’s Interest Rate Hike Backed by a Spike in Tokyo’s Core CPI

Today, on November 29, the Japanese yen hit a 6-week high amid growing expectations of an interest rate hike by the Bank of Japan. The yen recovered markedly, forecast to rise about 3%, its best performance since late July.

The yen strengthened 1.2% against the U.S. dollar to a new high, and the chart, along with some prime momentum indicators, such as RSI, point to the continuation of this rally, which is additionally bolstered by the higher-than-expected inflation in Tokyo. The all-important macro indicator has definitely boosted expectations for an interest rate hike by the Bank of Japan, due already next month. Potentially strengthening the case for a hike, Tokyo's core consumer price index rose 2.2% in November from a year earlier. That exceeded the average market forecast for a 2.1% gain and accelerated from a 1.8% gain in October.

Meanwhile, the overbought U.S. dollar finally declined against major currencies in trading weakened by the U.S. Thanksgiving holiday. At the same time, the pound sterling, New Zealand dollar and Chinese yuan rose to their highest levels in more than a week.

A decline in U.S. Treasury yields fueled the dollar's correction, while, at the same time, the Japanese currency strengthened on inflows into safe-haven assets amid Trump's warnings of broad tariffs on Mexico, Canada and China this week, as well as, as we mentioned above, the rising bets that the Bank of Japan will raise rates again on Dec. 19. Traders currently estimate the probability of a 0.25 percentage points hike at around 57%, and just over half of economists surveyed by Reuters forecast the same.