On Monday (April 29th), the significant fluctuation of the Japanese yen shocked global traders—last week's Bank of Japan (BOJ) meeting statement was less hawkish than expected, and yen bears continued to wreak havoc. The US dollar surged 2.3% against the yen, breaking through 158, and at one point in the early morning on Monday, it touched 160, reaching the highest level since April 1990. However, it then plummeted to around 156.
Despite Monday being a holiday in Japan, there are suspicions that the BOJ intervened, although there is no evidence to support this. The BOJ raised interest rates by 25 basis points (BP) for the first time in March this year, officially exiting the zero-interest-rate policy, but this did not prevent the yen from depreciating. In the past three months, the yen has fallen 6% against the US dollar, and the annual decline is nearly 17%. Even against the recently weak Chinese yuan, the yen has fallen nearly 8% this year, with a drop of over 4% in the past three months.
Several Chinese investors or individuals planning to study or travel in Japan told reporters from Yicai that, due to speculation that the BOJ's interest rate hike could drive a sharp increase in the yen, they had accumulated several million to tens of millions of yen. However, the recent decline has left them feeling confused, and with the yen offering almost no deposit interest, the opportunity cost of holding US dollar deposits has further increased.
Some foreign bank traders also told reporters that the bears' attack on Monday seemed to be forcing the BOJ to take interventionist action. This year, the BOJ appears to have only been "talking the talk." Data from the US Commodity Futures Trading Commission as of April 23rd shows that speculative short positions in the yen have reached the highest level on record, and as the exchange rate soars and then falls back, there is much attention on whether extreme sentiment can lead to a reversal.
The US dollar briefly broke through 160 against the yen.
In a foreign exchange discussion group, many yen hoarders were visibly worried.
"I bet that the yen would soar after the interest rate hike, so I bought 50 million yen at the beginning of this year," said Ms. Wang (a pseudonym).
"I didn't have as much as you; 6 million yen. I bought it at the end of last year at a cost of 5 yuan (5 yuan for 100 yen, which has now fallen to about 4.6). At that time, I thought I would use up the exchange quota because the US was going to cut interest rates, so I bought yen with an interest rate hike expectation," said another Ms. Liu (a pseudonym).
Mr. Liu (a pseudonym) said, "I've been 'bottom-fishing' all the way, buying 1 million yen at 4.84 and 4.74, but now I dare not buy anymore."
The anxiety of yen hoarders peaked on April 29th. In the early morning of that day, the US dollar/yen broke through the 160 mark, jumping more than 1%, reaching the highest level since 1990. This move was not driven by an expansion of the interest rate differential between Japanese and US government bonds. "The US bond market was closed due to the public holiday in Japan, and there were no significant changes in risk appetite in the Asian market, so this surge was obviously driven by speculative forces and could become a trigger for the Japanese government to instruct the BOJ to intervene in the foreign exchange market," Scott (David Scutt), a senior analyst at Gain Capital, told reporters.The depreciation of the Japanese yen remained relatively restrained in March, as traders believed that the key levels to trigger intervention by the Bank of Japan were 150 or 152. However, this changed dramatically in April. When the US dollar breached 150 against the yen, the depreciation of the yen was like a runaway horse, with yen bears continuing to push the USD/JPY currency pair to the 160 level.
The tolerance of the Bank of Japan is also one of the reasons for the sharp decline in the yen. Scott told reporters, "The 'intervention level' has clearly changed, but if the depreciation of the yen accelerates, then the authorities may take more measures. The Japanese government has repeatedly expressed concern about the continuous depreciation of the yen, which will continue to import inflation into Japan and worsen its trade conditions (making exports cheaper but imports more expensive)." However, due to the lack of strong intervention willingness from the Bank of Japan, traders continue to prefer high-yielding foreign currencies over the yen.
Last week, the Bank of Japan announced its interest rate decision, maintaining a wait-and-see stance, and decided to keep the monthly purchase volume of government bonds at the level before the March meeting. Questions at the press conference focused on the depreciation of the yen and its impact on monetary policy. Bank of Japan Governor Haruhiko Kuroda seemed to deny the necessity of adjusting monetary policy from the perspective of exchange rates. He reiterated that the core inflation trend is the most important, and the weak yen may only become a problem for monetary policy when its impact on core inflation becomes undeniable. This also led to a counterattack by yen bears.
Considering the many uncertainties surrounding this Thursday's Federal Reserve interest rate meeting and a series of economic data, institutions expect the one-week implied volatility of USD/JPY to jump significantly to 15.3%, compared to less than 10% last week, implying a potential exchange rate fluctuation range of 154.873~161.737 for this week. The market is short-term focused on the support near the lower track of 154.4~155, but if it breaks through 160 again, the next upper level will be 165.
Bears continue to test the Bank of Japan's bottom line.
On April 29, after touching 160, the USD/JPY fell sharply back to around 156, leading the market to suspect that the Bank of Japan had already entered the market.
On the same afternoon, Deputy Minister of Finance of Japan, Masato Kanda, stated that he would not comment on whether to conduct foreign exchange intervention. However, he said that appropriate measures would continue to be taken to deal with excessive foreign exchange fluctuations, and it would be announced by the end of May whether foreign exchange intervention would be conducted.
US Treasury Secretary Yellen was asked by the media last Thursday (25th) about her views on the Bank of Japan's possible intervention measures, stating that for "major countries where exchange rates are determined by the market," intervention should only occur in extremely rare circumstances. "We would hope that this is very rare, and we also believe that such intervention is only rarely done, only in cases of excessive fluctuations, and they will consult in advance," Yellen said.
Scott told reporters that as early as last Friday (26th), traders suspected that the Bank of Japan had intervened, as signs of intervention appeared near the 157 level of the US dollar against the yen. At 8 am local time in London that day, the USD/JPY fell 150 points from a high near 157 and then rebounded strongly. He said that perhaps the intervention has already begun to unfold slowly, but whether it can reverse the decline of the yen still needs to be observed.
However, there are also views that the Bank of Japan is pleased with the depreciation. "The Bank of Japan seems to just want to control the speed of the yen's depreciation, not to reverse it. After all, intervention means wasting bullets, and the depreciation of the yen is beneficial to Japan's exports. For example, the semiconductor industry and the automotive industry both benefit from this," a foreign bank trader told reporters.U.S. Key Data and Interest Rate Decisions Dominate the Forex Market
The key factor behind the yen's weakness remains the significant U.S.-Japan interest rate differential, which is unlikely to change in the short term. Currently, the U.S. demand deposit rate is close to 5%, while the yen deposit rate is negligible, and the yield difference between U.S. and Japanese 10-year government bonds is as high as nearly 4 percentage points. This means that if the yen does not appreciate, yen bulls would lose nearly 5% in interest just by holding yen without doing anything.
Shigeto Nagai, the head of Japanese economic research at Oxford Economics, told reporters that the next interest rate hike could occur in the second half of 2024, depending on how wage increases are transmitted to service prices. The institution expects that by 2028, the Bank of Japan will cautiously raise the policy rate to 1%. This implies that the magnitude of interest rate hikes will be very limited, making it difficult for the U.S.-Japan interest rate differential to narrow.
For the yen, a series of significant events and data in the United States this week are crucial. The Federal Reserve will announce the interest rate decision at 2 a.m. Beijing time on Thursday (May 2nd). Recent data show the stickiness of inflation, and the continuously warming commodity prices may make the situation worse. Therefore, from the current market pricing, there is almost no possibility of a rate cut in the first half of the year, and it may have to wait until the fourth quarter. Whether there will be a rate cut before the U.S. presidential election in November is particularly noteworthy.
Some believe that while maintaining a hold, Federal Reserve Chairman Powell may continue to reiterate the stance of "maintaining high interest rates for a longer period." Whether to slow down the pace of quantitative tightening is also a focus of attention. Overall, the interest rate outlook combined with safe-haven sentiment is expected to help the U.S. dollar maintain its strength.
In addition, the U.S. non-farm payroll employment data for April will be released at 8:30 p.m. on Friday (May 3rd). In March, the U.S. added 303,000 jobs, the largest increase in nearly a year, with the unemployment rate slightly falling from 3.9% to 3.8%, and average hourly earnings growth slowing to 4.1% year-on-year. From any perspective, the labor market is very strong. This time, it is expected to add 243,000 jobs, with the unemployment rate remaining unchanged at 3.8%. Optimistic data may further reduce the expectation of rate cuts this year, thus benefiting the U.S. dollar.
Before the non-farm report is released, this week will also see a series of employment market data such as job vacancies, ADP changes, and initial jobless claims. Other economic data include ISM manufacturing (Wednesday) and services PMI (Friday).