(Bloomberg) — The yen swung in holiday-thinned market conditions, punching through 160 per dollar to its weakest in 34 years before rebounding strongly and raising speculation authorities may have intervened.
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The Japanese currency dropped as much as 1.2% to 160.17 per dollar on Monday before heading in the other direction to rally more than 2%. The moves, which took place amid thin liquidity due to a local public holiday, may also be signs of nervous traders juggling the prospects of official intervention with the risks of hawkish comments by the Federal Reserve later this week.
Japan’s top currency official Masato Kanda said he had “no comment for now,” when asked by reporters whether or not he intervened in the currency market.
“The market is very jumpy and with not a lot of liquidity, the yen becomes a sharp toy to play with,” said Rodrigo Catril, a strategist at National Australia Bank. “The risk of intervention is an added factor.”
Some in the market put the sharp moves down to the thin trading conditions, with Shoki Omori, chief desk strategist at Mizuho Securities Co. suggesting algorithm-driven accounts may have been partly responsible. But others saw the hand of officials at work.
“The move has all the hallmarks of an actual BOJ intervention and what better time to do it,” said Tony Sycamore, market analyst at IG Australia in Sydney. A Japanese public holiday “means lower liquidity in dollar-yen and more bang for the BOJ’s buck.”
Fed Risk
The US central bank is scheduled to hold a policy meeting during which it may signal the need to keep interest rates elevated amid sticky inflation — a move that would likely support the dollar and undermine the appeal of yen assets. But behind the fundamentals which point to a weaker yen is the risk that Japan steps into supporting its currency, as it did in 2022.
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“Should there be no intervention, it would be dangerous to catch a falling knife, particularly with the Fed likely to signal a longer wait for cuts,” said Fiona Lim, senior strategist at Malayan Banking Bhd. “Momentum is definitely there for the dollar-yen to move decisively above the 160 and markets are testing Japan’s tolerance for a sharp yen decline.”
The Bank of Japan last week indicated financial conditions will remain easy, although policymakers have repeatedly warned that depreciation won’t be tolerated if it goes too far too fast. Earlier this month, the nation’s finance minister also flagged concerns over the yen’s decline to US Treasury Secretary Janet Yellen, which market participants saw as laying the groundwork for intervention.
Japan’s Kanda has given an example of a 10-yen move over one month as a rapid one. Japan’s currency has weakened by about 8 yen per dollar over the last month, but it fell over 2% last week alone and is down more than 10% year-to-date.
One reason for Japan’s seeming reluctance to act may be that intervention alone cannot alter the wide gulf in interest rates that is in part driving the yen’s decline. While the BOJ has brought local rates out of negative territory, they are still far from levels that would tempt investors from the higher yields on offer in the US and other countries.
“The current pace of depreciation is less than in 2022 so the intervention response could be less intense,” wrote Vincent Chung, associate portfolio manager at T. Rowe Price. “Additionally, market participants have priced in the possibility of intervention by authorities following the BoJ meeting in May, as indicated by option pricing.”
Yen Watchers Ask When Japan Will Step In as Slide Accelerates
Bets in the options market helped to exacerbate the yen’s drop on Monday, with barriers against the dollar and euro being targeted on the view intervention risks were likely low during a Japan holiday, according to Asia-based traders. Against the euro, the yen has fallen beyond 170 to the weakest since the creation of the common currency.
“Pressures will remain on the currency until we get more downbeat growth and inflation data in the US and a clearer hawkish shift at the BOJ,” said Homin Lee, senior macro strategist at Lombard Odier in Singapore. “We still think we are quite close to the Finance Ministry’s intervention, in light of the recent rhetoric on excessive currency market moves.”
–With assistance from Michael G. Wilson, Matthew Burgess, Erica Yokoyama and Emi Urabe.
(Updates levels.)
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