The value of the yen has plunged well beyond Japan’s red line. Traders are wondering when authorities will start buying more currency and why they haven’t done so yet.
The yen fell to a 34-year low against the dollar after the Bank of Japan indicated on the 26th that monetary easing would continue. As the 29th is a public holiday in Japan, there is a risk that liquidity in the foreign exchange market will decline, increasing the risk that the Yen will fall further.
Finance Minister Shunichi Suzuki reiterated after the Bank of Japan meeting that the government would respond appropriately to foreign exchange movements. Earlier this month, the minister expressed concerns about the yen’s depreciation to US Treasury Secretary Janet Yellen, but market watchers saw this as a prelude to intervention.
Finance Minister Masato Kanda says a 10 yen move in one month is considered a sudden move. The Yen has depreciated by around 7 yen against the dollar in the last month, but has fallen by less than 2% in the last week alone, and has depreciated by more than 10% since the start of the year.
Chris Weston, Head of Research at Pepperstone Group “They are challenging the Japanese authorities like the vigilante bond groups of the past.”
One reason why Japan appears passive may be that intervention alone cannot change the magnitude of the interest rate differential that contributes to yen depreciation. Although Japanese interest rates have moved out of negative territory, they are still far from the levels that would tempt investors from the high yields of the United States and other countries.
Goldman Sachs Group strategists say the global macroeconomic backdrop suggests further yen weakness, which could make successful intervention difficult.
Kamaksha Trivedi, Global Head of Currencies, Rates and Emerging Markets Strategy at Goldman said: “Our underlying outlook of strong growth, moderate policy accommodation, and the risk of a further rate hike is a negative combination ok for the Yen The only question is how strongly Japanese policymakers will resist the depreciation of the Yen, but their options for doing so appear to be limited.
Still, the risk of intervention will increase significantly if the yen continues to underperform other assets, as it did on Wednesday, Goldman strategists added. The yen exchange rate fell 1.7% on the same day, falling to around 158.30 yen to the dollar.
A weaker yen is not necessarily a bad thing for Japan, said George Saravelos, head of global currency research at Deutsche Bank. The weaker yen is not causing inflationary problems and is boosting the value of foreign assets held by Japanese investors, he said in an emailed report.
In a press conference after the Bank of Japan’s policy decision on the 26th, Governor Kazuo Ueda did not take the impact of the weaker yen on inflation seriously, stating instead his belief that the exchange rate was bringing benefits to the economy by boosting the demand for Ta .
Saraveros said on the 26th, “Japan has a policy of moderately devaluing the yen. If the market becomes unruly, we cannot rule out the possibility of intervention, but Governor Ueda downplayed the importance of the depreciating yen at today’s press conference.” raise rates.”
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Traders do not seem to think that the Japanese intervention will be successful. According to data from the US Commodity Futures Trading Commission (CFTC) dating back to 2006, the combined short positions of the Yen by hedge funds and asset managers before the Bank of Japan meeting reached an all-time high. On the other hand, concerns are rising, as seen by last week’s large increase in implied volatility.
Shorting the yen at current levels is risky, but speculators who are bearish on the yen are likely to plan to buy the dollar at lower levels if authorities act, Pepperstone’s Weston said.
“I can imagine hedge funds setting up their algorithms with limit orders 400-500 pips below the spot to catch intervention moves, knowing that if the dollar drops suddenly, it will bounce back quickly, ” he said.
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Original title: Yen Watchers Ask Where Japan Is as Currency Losses Accelerate (excerpt)
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