Brown Brothers Harriman’s (BBH) Elias Haddad highlights that recent market movements, driven by Brent crude oil prices exceeding $100 per barrel, have resulted in higher bond yields, weaker equities, and modest support for the US Dollar (USD) [1]. However, despite sticky US August Consumer Price Index (CPI) inflation reinforcing expectations for a September Federal Reserve (Fed) rate hike, the USD ultimately finished broadly flat at the end of last week [1].
The focus now shifts to upcoming decisions from the Fed and the Bank of Japan (BoJ), with BBH noting that risks are tilted toward a lower USD/JPY exchange rate [1]. The futures curve currently prices in nearly 100 basis points (bps) of tightening over the next twelve months: 25bps expected this week, another 25bps by year-end, and almost 50bps by September 2027 [1]. BBH argues that this setup creates asymmetric risks for the USD, with limited upside from a hawkish Fed outcome but greater downside potential if the Fed surprises dovishly [1].
BBH’s bottom line is that risks are skewed toward further gains for the Japanese Yen (JPY). A hawkish 25bps Fed hike would likely extend the JPY rally, while a surprise 50bps move could significantly accelerate it [1]. Conversely, a bearish scenario for the JPY would involve only a narrow majority supporting a 25bps hike and/or BoJ Governor Ueda pushing back against market rate expectations [1].
CONCLUSION
BBH expects the Japanese Yen to benefit from upcoming central bank decisions, with asymmetric risks favoring further JPY appreciation. Market participants should monitor the Fed and BoJ outcomes closely, as surprises could drive significant moves in the USD/JPY pair.