(Bloomberg) — The yen hit its strongest level against the dollar since December, outperforming other major currencies on Thursday amid growing speculation the Bank of Japan will hike rates sooner rather than later.
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Japan’s currency climbed as much as 1% to 149.95 against the dollar, a level it hasn’t touched since Dec. 9, before paring gains. Government bond yields are also on the rise, with the 10-year benchmark hitting its highest level since 2009. Overnight index swaps are pricing in an 84% chance of a rate hike by the central bank’s July meeting, compared with about 70% odds at the start of this month, with a hike now seen as certain by September.
Japan’s recent data has supported the BOJ’s case for raising rates, with gross domestic product outperforming forecasts and nominal wages jumping by the fastest pace in nearly three decades. Central bank governor Kazuo Ueda also said on Thursday that he did not discuss rising yields in a meeting with Japanese Prime Minister Shigeru Ishiba.
“BOJ Governor Ueda and Prime Minister Ishiba’s meeting probably provided yen bulls enough confidence to chase dollar-yen lower after parsing through Ueda’s remarks,” says Alex Loo, a macro strategist in Singapore. “Given the absence of any discussion on the recent bout of yen strength and rising Japanese bond yields, we could interpret that authorities are more comfortable with further hikes.”
BOJ Board Member Hajime Takata also said on Wednesday that it’s important to continue considering gradual rate hikes, while also noting that Japan’s bond yields are moving in line with the market’s view of the economy.
READ: BOJ’s Hawkish Member Calls for Further Rate Hike Consideration
Options traders rushed to add bullish yen exposure as the currency rallied in the spot market.
Hedge funds bought structures that pay out if the yen strengthens to between 145 and 140 per dollar over the next three to six months, according to currency traders familiar with the transactions who asked not to be identified because they aren’t authorized to speak publicly.
A closely watched gauge of market sentiment and positioning that covers one-year expectations shows that investors are now the most bullish the yen since mid-October. When it comes to the short-term, demand for the yen picked up at the second-fastest pace in three months, while hedging costs are poised for the strongest close in more than a week.
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