Yen Soars to Two-Month High Versus Dollar, Euro
In the ever-dynamic world of foreign exchange, the recent shift in the Japanese yen's performance against the US dollar marks a pivotal moment in financial markets. After a prolonged period of depreciation against the dollar, the week of July 17, 2023, has witnessed a notable change in trend, with the yen breaching the critical level of 153 yen to the dollar for the first time since early May during the Asian trading session on July 25.
As investors closely monitor expectations surrounding the Bank of Japan's impending interest rate decision, the market's speculations have intensified. Influenced by recent interventions in the forex market by Japanese authorities, many investors are hastening to close their yen short positions. However, whether bearish sentiment towards the yen will resurface ultimately hinges on the central bank's announcements in the coming days.
Since the beginning of this month, the yen has rebounded from its previous struggles, emerging as the best-performing currency among the G10 group. On July 25, the dollar slumped to 153.10 yen at one point, hitting its lowest level since May 6, which reflects a significant turnaround for Japan's currency.
Market speculation around the likelihood of additional Bank of Japan tightening, coupled with recent forex market interventions, prompted investors to unwind carry trades that were funded in yen. The Commodity Futures Trading Commission (CFTC) reported that leveraged funds slashed their net short positions in the yen by 38,025 contracts last week, marking the largest reduction since March 2011. Asset management companies also significantly reduced their yen short holdings, showcasing a trend not seen in a year.
Advertisement
According to Yukio Ishiuki, a senior forex strategist at Daiwa Securities in Tokyo, the appetite for selling the yen has diminished following a series of interventions by Japanese authorities. He anticipates that closing short yen positions will dominate market movements leading up to the upcoming policy decision by the Bank of Japan.
Market speculations suggest that authorities might have intervened in the forex market between July 11 and 12, deploying a staggering 5.64 trillion yen to stabilize the currency after the yen had once again fallen to a 40-year low against the dollar. Notably, on July 11, the yen enjoyed its largest single-day gain since May 1. Later that evening, Japan's Deputy Finance Minister Masato Kanda notably refrained from confirming the government's intervention claims, encapsulating the complexity surrounding these market maneuvers. Yusuke Miyairi, an international forex strategist at Nomura, emphasized that Kanda's ability to address the media at such a late hour implies significant underlying concerns about market conditions.
In light of these interventions, the prevailing sentiment among investors seems to be increasing bearishness toward the dollar, driven by firm expectations that the Federal Reserve may commence rate cuts as early as September. Nevertheless, the end of July presents a considerable test for the yen, as both the Federal Reserve and the Bank of Japan are poised to announce their respective interest rate decisions. Any dovish signals from the Bank of Japan could potentially revitalize yen short-selling sentiment. Yujiro Goto, head of forex strategy at Nomura Securities, commented, "There is no doubt that the market dynamics for the yen have shifted; however, it remains too early to draw long-term conclusions."
Some analysts are growing more bullish on a potential rebound in the yen. Jonas Goltermann, Deputy Chief Market Economist at Capital Economics, stated that the interest rate differential between Japan and the US might continue to shift favorably for the yen, forecasting that the yen could strengthen further against the dollar, reaching 145 by year-end. Brian Daingerfield, a forex strategist at National Westminster Bank, added, "Even if the Bank of Japan's upcoming statement lacks the expected hawkish tone, it is still plausible that the Ministry of Finance will act to curb yen weakness. The reality is that the Federal Reserve also appears to be nearing the onset of a loosening cycle."
Beyond dollar dynamics, the yen's relationship with the euro has also emerged as a potential trigger point for Japanese intervention in forex markets. Earlier in July, the euro reached a historic high against the yen, touching 175.43—its highest level since the euro's inception in 1999. Citigroup warned in a report that with the euro accounting for approximately 20-30% of Japan's foreign exchange reserves, Japan might reduce its euro reserves after multiple interventions in the dollar market to prevent allocation imbalances. Should the euro continue to approach 180 yen, Japan's likelihood of intervening to sell euros may increase significantly. Following this, on July 12, the Bank of Japan conducted an exchange rate check on the euro, a measure typically undertaken amidst heightened volatility when verbal intervention seems insufficient. The previous rate check occurred in September 2022, shortly followed by actual forex intervention, leading to a swift retracement of the euro against the yen.
As the market sets its sights on the upcoming Bank of Japan interest rate meeting, the conversation around forex intervention remains crucial. Many in the market speculate that Japan’s central bank may express a hawkish stance during its policy meeting on July 30-31, as insiders suggest discussions surrounding possibly raising interest rates are on the table. Furthermore, reports indicate plans to curtail bond purchases by about half over the next few years, reinforcing a commitment to gradual unwinding of expansive monetary policies.
Insiders revealed that opinions within the Bank are divided: some officials advocate for a cautious approach, waiting for more robust consumer spending data before making decisions, to avoid projecting an overly hawkish image. Conversely, others point to current inflation rates aligning with expectations, maintaining an open position regarding a potential rate hike in July while flagging concerns over future uncertainties that could preclude additional hikes later in the year if a July decision isn’t reached.
The economic data out of Japan presents a mixed bag as well. June's core inflation hit 2.6%, running above the Bank's target for over two years, while average wages in May reached their highest increase in three decades. This data supports the hawkish case for an interest rate increase, especially following this week’s announcement that Japan's minimum wage will rise by approximately 5% to 1,054 yen per hour, the largest historical increase recorded. However, disappointments in recent consumer spending figures and consumer confidence indices solidify the dovish argument that more data is necessary to validate whether tax cuts and wage hikes translate into improved consumption.
According to four individuals familiar with the Bank's thoughts, the upcoming rate decision will largely depend on discussions around consumer recovery and sustaining inflation near the targeted 2%. “It is evident that the Bank of Japan is likely to raise rates in the coming months; it is just a matter of timing,” one individual commented. Another stated, “For the Bank, exiting quantitative easing remains a lengthy endeavor. Even if rates rise again, the monetary conditions in Japan would still be regarded as very loose.”
Surveys among economists show that more than three-quarters expect the Bank of Japan to hold steady this month, with the next possible action anticipated in September or October. Those consulted indicated that while there is a general consensus among the nine-member board regarding the necessity of a rate hike in the near term, reaching agreement on whether this should occur in the upcoming meeting or later remains elusive.
On the same day that the Bank of Japan meets, the Federal Reserve will also convene to discuss rates. Given the declining inflation in the U.S. and a slowdown in economic growth over recent months, market expectations suggest that the Fed is likely to provide stronger signals for a September rate cut.
What transpires at these meetings will undoubtedly shape the trajectory of the yen, as domestic and international pressures continue to evolve. The potential adjustments in bond purchase volumes seem more certain than the interest rate hike outlook, as reports hint that the Bank may implement a gradual reduction strategy in line with market expectations, facilitating a smooth transition while avoiding abrupt spikes in Japanese bond yields.