FOREX-Yen rallies sharply as markets raise bets on Bank of Japan rate hikes

The ‌yen ​extended gains on Thursday after a sudden burst higher in the previous session, though traders stopped short of attributing the move to intervention by Japanese authorities and instead pointed to rising bets on Bank of Japan rate hikes. The yen rose almost 1.5% to a ‌high of 156.36 per dollar, its strongest in a month, extending its 0.9% jump overnight.

Markets were on alert for any official intervention from Tokyo, though analysts suggested the move was more orderly than is typically the case when Tokyo steps in. The Japanese currency's rally was broad-based, with the euro sliding more than 1% to 181.62.

"I believe there's little incentive for (the) Japanese government to ‌intervene at this moment," said Kazumasa Ishii, a strategist at UBS SuMi Trust Wealth Management, citing "limited" signs that dollar/yen could scale a new multi-decade high in the near term. The ‌renewed yen strength follows hawkish comments from Bank of Japan (BOJ) board member Hajime Takata, who said on Wednesday the central bank should conduct interest rate hikes nimbly to counter intensifying inflationary pressures, rather than adhere to a fixed semiannual pace anticipated by markets.

"(The) remarks are the strongest messaging we've heard from the board and reintroduces the idea of an expedited rate hike trajectory," Citi said in a client note, adding that the market is ⁠taking Takata's comments "more ​seriously". A BOJ rate hike this month is ⁠nearly fully priced in by markets.

Since a rare joint yen-buying intervention between the U.S. and Japan on July 31, the yen has struggled to find lasting support, coming under pressure from still-wide interest rate differentials, fiscal worries ⁠and a renewed spike in energy prices. Chris Turner, global head of markets at ING, said a Federal Reserve rate hike in September — which markets are increasingly pricing in after Chair Kevin Warsh's hawkish speech ​last week — would likely limit the dollar's fall against the yen.

"Any sustainable turn lower in USD/JPY now probably requires a much more hawkish Bank of Japan and ⁠some new initiatives to encourage domestic investment in Japan," he said. WAITING ON PAYROLLS

In the broader market, the yen strength left the U.S. dollar on the back foot, with the euro up 0.2% to $1.161. Sterling rose 0.1% from ⁠a ​three-week low and last bought $1.35. Against a basket of currencies, the dollar dropped 0.4% to 99.25.

The New Zealand dollar rose 0.3%, having slid 0.7% on Wednesday following a dovish hike from the country's central bank. The Canadian dollar extended overnight gains after the Bank of Canada held rates on Wednesday but signalled its readiness to tighten policy to rein in inflation.

All eyes ⁠are now on Friday's U.S. nonfarm payrolls report, where analysts forecast an increase of 56,000 in jobs, following July's shock drop of 23,000, with unemployment holding at 4.1%. A much ⁠weaker outcome would probably be needed to ⁠greatly lessen the risk of a September rate hike from the Federal Reserve, with markets now pricing in a 61% chance of a move.

"Payrolls, I think, could come in solid again, given the supply shocks like the lower immigration and increased retirement," said Carol Kong, ‌a currency strategist at Commonwealth ‌Bank of Australia, "that would give another boost to FOMC rate-hike pricing."