Looking to the Futures

Japanese Yen futures have exhibited a period of range-bound low volatility trading over the last 3 months as we await interest rate decisions from both the Federal Open Market Committee (FOMC) and the Bank of Japan (BOJ).  With the FOMC set to decide on Wednesday, the CME FedWatch tool currently sits at a 96 percent chance of a 25-basis point cut (target range 400-425) and a 4 percent chance of a 50-basis point cut (target range 375-400).  As the Fed has received political pressure to lower rates, they have decided to take a data-driven approach to their rate decisions to achieve their dual mandate of maximum employment and price stability. 

Recent inflation data published in August suggested that tariffs may be filtering into consumer prices. The latest data from the Bureau of Labor Statistics showed a 2.9% annual increase in August to CPI (Consumer Price Index) which was up month over month.  Another important determinate for the FED just hit a 4-year high for its figure in weekly jobless claims. Published last week, the data hints at a cooling labor market with weekly jobless claims rising to 263,000. 

As we shift to the Bank of Japan who makes their decision on Friday, their MPM (monetary policy meeting) will shed some light on their future expectations.  Compared with other central banks, the BOJ has historically kept their interest rates low with minimal adjustments due to persistent deflation or lower than expected economic growth.  Going back to early February of 2024 the BOJ had a target rate of -0.10% and has since implemented 3 hikes to their current range of 0.50%.  Their most recent decision in July left the 50-basis point policy rate unchanged, but current expectations and trader positioning show expectations of at least a 25-basis point raise towards year end. 

Correlation coefficients have been used historically to paint a picture as to how the Japanese Yen is impacted versus the U.S. Dollar.   As we approach the two rate decisions, the correlation coefficient has moved to -0.87 meaning the inverse nature of these two currencies is strengthening (-1 being perfect inverse and zero being no correlation).  An interesting point to consider is that rates traditionally move preceding interest-rate decisions from the FOMC. For example, on the Micro 10-year yield futures (/10Y) we’ve noticed a move since July from roughly 4.50 down to its current trading range around 4.00. 

Based on historical information, the data suggests that we will see increases in Japanese Yen (/6J) volatility as rate decisions that materialize.  This can result in that inverse correlation between the Japanese Yen and the U.S. Dollar that is currently showing strength to weaken.

Traders should consider the impact to /6J as the yen-carry trade narrows.  The yen-carry trade can be explained by borrowing Japanese Yen at the BOJ’s low set interest rate and then using the funds to invest in a currency that pays a higher rate like the U.S. Dollar.  If future expectations are that the BOJ hikes into year end and the FOMC cuts into year end, then we will see the spread between these currencies narrow which can cause currency volatility. 

Housing starts 8:30 AM ET

Building permits 8:30 AM ET

FOMC Rate Decision 2:00 PM ET

Fed Chair Powell press conference 2:30 PM ET

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