Yen's big week begins

A look at the day ahead in European and global markets

By Tom Westbrook, Chief Correspondent

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Tokyo traders returned on Tuesday from a three-day holiday weekend, showing little inclination to repeat the yen's low-liquidity climb to the strong side of 140 per dollar, where it made a brief cameo on Monday.

But the dollar/yen pair - and the 140 milestone - are in the spotlight this week, with the Fed expected to begin a U.S. easing cycle and the Bank of Japan charting a path to interest rate hikes.

Banknotes of Japanese yen are seen in this illustration picture taken September 22, 2022. REUTERS/Florence Lo

Market pricing for an outsized 50-basis-point Fed hike on Wednesday ran to 67% on Tuesday, up from 30% a week ago.

The yen hit a 38-year low on the dollar in early July but has been on a tear since, gaining more than 12% as the gap between two-year U.S. and Japanese rates shrank by some 130 basis points over 11 weeks.

Further gains are likely if a nudge from either a dovish Fed or a hawkish BOJ pushes it firmly through 140, which would open the way to an assault on last January's yen peak at 127.215 per dollar.

It would also push the yen through the strong end of corporate assumptions for exchange levels this financial year, turning them into buyers and adding to already hard-running momentum. Japanese stocks are leery, with the Nikkei down 1.7%.

Ahead of the Fed, a German sentiment survey due on Tuesday is expected to show a slight deterioration this month and U.S. retail sales are forecast to have contracted month-on-month in August.

Markets will likely look past the numbers, with the focus as much on the size of this week's expected U.S. rate cut as on the reasons for it and the forward guidance, as a sounding board for how to interpret the next few weeks and months of economic data.

A research arm of BlackRock, the world's largest asset manager, reckons a resilient economy will keep rate cuts shallower than the 250 bps traders have priced in for the next 12 months.

Elsewhere in Asia, Australia's benchmark ASX 200 hit a record high while Chinese home appliance maker Midea rose 9.5% on its trading debut in Hong Kong. Mainland Chinese markets were closed for a holiday.

Graphics are produced by Reuters.

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