Bloomberg: Bank of Japan hits yen speculators, but U.S. inflation can turn things around

10 November 2022 67
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Source: Bloomberg

Authors: Yoshiaki Nohara and Chikako Mogi

ArticleOriginal article

Publication date: Thursday, November 10, 2022


Japan has had some success in the battle against speculators aiming to weaken the yen, but there are more challenges ahead.

 

Speculative positioning has been limited, at least in the foreign exchange market, after several months of talking grown into action. Combined with favorable declining demand for the U.S. dollar, it has kept the yen well away from the key 150 per dollar mark in recent weeks, though Thursday's U.S. inflation data pose a threat. 

 

The unannounced currency intervention, accelerated bond buying and additional budgeting have helped Japan show financial markets that it is standing its ground even as the rest of the world tightens monetary policy. But investors are well aware that Japan stands apart, especially in the currency market, where the U.S. has refused to openly support a policy of currency intervention.

 

The market reaction to U.S. consumer price data may provide further evidence that Japan has played its cards relatively well, or show that the recent calm was only a prelude to a new storm. Higher than expected inflation could cause the yen to weaken, prompting traders to expect even more rate hikes in the U.S., while softer price growth could have the opposite effect.

 

“If CPI continues to be very strong, the dollar may rise again but it’s hard to see US economy enduring rate hikes up to 5.25%,” said Kato. “The probability is rising that the recent dollar-yen high of 151.95 may be seen in retrospect as the peak.”

 

“If you ask me whether Japan has had some success with its forex interventions, I’d say yes,” said Hideo Kumano, executive economist at Dai-Ichi Life Research Institute. “The interventions on Oct. 21 and 24 went well in that the authorities moved early because they knew the impact would be weaker if they waited until the Fed meeting.” 

 

The market reaction to U.S. consumer price data may provide further evidence that Japan has played its cards relatively well, or show that the recent calm was only a prelude to a new storm. Higher than expected inflation could cause the yen to weaken, prompting traders to expect even more rate hikes in the U.S., while softer price growth could have the opposite effect. 

 

Analysts say Japan probably sold some U.S. Treasuries to demonstrate the strength of its currency reserves. “Japan is trying to send a strong message that it has ample resources to intervene,” said Yuji Yamazaki, currency strategist at SMBC Nikko Securities. Yamazaki, along with some other economists, believes Japan has been selling Treasuries despite earlier skepticism that such action might raise Washington’s ire and result in a self-defeating rise in US yields that renews pressure on the yen.

 

Some investors' bets that the market could put pressure on the Bank of Japan to withdraw from its super-soft policy also likely helped strengthen the yen. Despite the central bank's insistence that it will stick to the 0.25% yield cap on 10-year debt, swap markets are still pointing to a policy adjustment, possibly around the time Chairman Haruhiko Kuroda steps down in April. According to market participants, even a slight signal from the central bank that it is considering abandoning its soft policy could lead to a yen rally. 

 

For now, it looks like Japanese policymakers have bought enough time without letting the market pressure them down. A change in Fed policy has long been seen as a key game changer for the yen, and Jerome Powell's announcement of a lower pace of rate hikes in the future may have provided that point.

 

Still, Powell also noted that U.S. rates will eventually be higher than the markets think, which is a classic central bank ploy. “That means it will take time to reach the final phase of rate hikes,” said Osamu Takashima, chief FX strategist at Citigroup Global Markets Japan. “And that means the period of uncertainty will be prolonged.”

 

Forecast:

 

The current quiescence in the USDJPY pair could be interrupted with the release of U.S. inflation data for October. In this case, even if the price growth in recent months was declining, it still did not meet the optimistic expectations of market participants. Therefore, an upward push of the dollar is more likely now.

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