Yen at 3-week low as traders weigh BOJ shift; RBA stands pat

By Ankur Banerjee

SINGAPORE (Reuters) – The yen slipped to a fresh three-week low on Tuesday as the Bank of Japan’s steps last week to tweak its yield curve control policy weighed on the currency, while the Australian dollar fell after the Reserve Bank of Australia left cash rates unchanged.

Australia’s central bank on Tuesday held interest rates at 4.1% for a second month, saying past increases were working to cool demand, but warned some more tightening might be needed to curb inflation.

The Australian dollar fell 0.73% to $0.6668 after the decision, nearly wiping out its 0.87% gains it clocked in July.

Matt Simpson, senior analyst at City Index, said the move suggested not everyone was positioned for RBA’s hold, noting that weaker-than-expected data from China also weighed on the risk-sensitive currency.

“I think it was right that the RBA held today, given trimmed mean inflation and unemployment matched the RBA’s forecasts. And it may have sent a confusing message had the hiked following softer inflation and retail trade data.”

Earlier in the session, the yen slipped to 142.84 per dollar, its lowest in three weeks. It last fetched 142.79, down 0.36%.

The Asian currency has been on a wild ride since Friday, when the BOJ took another step toward a slow shift away from decades of massive monetary stimulus, saying it would offer to buy 10-year Japanese government bonds at 1.0% in fixed-rate operations, instead of the previous rate of 0.5%.

“Markets could test just how ‘flexible’ the BOJ will be in the months ahead,” said Carlos Casanova, senior Asia economist at UBP in Hong Kong, in a note, adding the subtle changes suggest the BOJ may be gearing up to changing the YCC target in 2023.

“As the new line in the sand is 1%, it would make sense to broaden the YCC band by this level.”

The move from the BOJ could also have seismic implications for global money flows, since a cheap yen that’s been inexpensive to borrow has been a mainstay of capital market funding for years and it now faces upward pressure from rising Japanese yields just as global rates seem to peak.

Meanwhile, private surveys showed on Tuesday that Asia’s factory activity shrank in July, as the region’s fragile recovery takes a hit from slowing global growth and weakness in China’s economy.

China’s Caixin/S&P Global manufacturing purchasing managers’ index (PMI) fell to 49.2 in July from 50.5 in June, missing analysts’ forecasts of 50.3 and marking the first decline in activity since April.

The spot yuan opened at 7.1550 per dollar and was changing hands at 7.1648 at midday, 0.51% weaker than the midpoint. [CNY/]

On Monday, Federal Reserve survey data showed U.S. banks reported tighter credit standards and weaker loan demand from both businesses and consumers during the second quarter.

The Fed’s quarterly Senior Loan Officer Opinion Survey, or SLOOS, also showed that banks expect to further tighten standards over the rest of 2023, adding to further evidence that rising interest rates are having an impact on the economy.

Against a basket of currencies, the dollar rose 0.118% to 102, after scaling a fresh three-week peak of 102.07 earlier in the session.

Sterling was last at $1.2829, down 0.06% on the day, having gained 1.1% in July. Bank of England’s policy meeting on Thursday is in the spotlight, with markets evenly divided between a 25- and 50-basis-point increase.

The euro eased 0.05% to $1.0987, while the fell 0.32% to $0.619.

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