Yen subdued, Aussie firm on improved sentiment before central bank meetings

TOKYO (Reuters) – The yen was restrained while the risk-sensitive Australian dollar held firm on Wednesday on the back of a solid commodity market and a positive risk mood from upbeat U.S. economic data and upbeat corporate earnings.

FILE PHOTO: A Japan Yen note is seen in this illustration photo taken June 1, 2017. REUTERS/Thomas White/Illustration

The Japanese currency was also hampered by expectations that the Bank of Japan (BOJ) will signal a strong commitment to maintaining its easy monetary settings this week even as many other central banks around the world look to tighten their policy to stem inflation.

The dollar held firm at 114.20 having put on 0.37% in the previous session, staying near its four-year high of 114.695 touched a week ago.

“After the pandemic, the dollar became the ultimate safe-haven currency but recently the yen’s beta (sensitivity) to stock prices is becoming stronger than the dollar’s,” said Shinichiro Kadota, senior FX strategist at Barclays.

Wall Street shares closed at a record high on Tuesday thanks to solid corporate earnings. U.S. economic data published on Tuesday was also upbeat, with consumer confidence rising unexpectedly and new home sales surging more than expected.

The BOJ is widely expected to downgrade its economic assessment at its policy announcement on Thursday, with markets betting on no rate hike in the foreseeable future.

The European Central Bank, which holds its own policy meeting on Thursday, is also expected to be slow in tightening its policy, keeping the euro in check.

The euro stood at $1.1594, having eased 0.4% so far this week.

On the other hand, a rally in risk assets such as stocks and commodities underpinned the Australian dollar and other commodity-linked currencies.

The Australian dollar held firm at $0.7506 after three straight days of gains ahead of domestic inflation data on Wednesday.

The index of emerging market currencies hit its highest level in almost six weeks.

The Canadian dollar, however, lost some of its steam as traders got nervous the Bank of Canada would temper investor expectations at policy announcement later in the day.

The BoC could become the first central bank from a G7 country to end stimulus from its pandemic-era bond-buying program amid hot inflation and a recovering job market.

Markets are expecting a C$1 billion reduction in its bond purchase, while fully pricing in a rate hike by April next year.

“While the market is likely correct in expecting another C$1bn cut in the pace of asset purchases, the more sensitive question is on the policy rate, and here we think it might be next to impossible for the Bank of Canada to validate market pricing on lift-off timing,” Michael Hsueh, research analyst at Deutsche Bank in New York, said in report.

Among emerging market countries where inflation is getting more pronounced, the Brazilian central bank is also widely expected to raise interest rates by 100 basis points to 7.25% on Wednesday.

Some analysts say the Brazilian real could be at risk of a further fall unless the Banco Central do Brasil hikes rates more than market forecasts.

In crypto, bitcoin fell almost 5% to $60,114 while ether slumped 2.4% to $4,120.

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