Japan’s Ministry of Finance must have been relieved last week after the US dollar sold off following the release of weaker-than-expected US Non-Farm Payrolls data on Thursday. This helped to temper some of the more aggressive tightening expectations which had been priced into the greenback.
Last month’s Federal Reserve monetary policy meeting, Kevin Warsh’s first as Chair, was far more hawkish than expected. This saw the probability of at least one 25-basis point rate hike before year-end rise to 85%. After Thursday’s payroll report, it dropped back to 76%, and the dollar fell accordingly. Yet the USD/JPY had fallen sharply ahead of the data release.
Some traders wondered if Japan had begun to intervene to support its currency. But it was little more than position-closing ahead of Friday’s US holiday, when many analysts had speculated that the thin FX market could provide the Japanese authorities with the perfect situation in which to intervene. They didn’t, and the dollar has bounced back this morning, once again pressuring the yen.
The USD/JPY pushed up above 162.00, closing in on the 40-year high of 162.84 hit on Wednesday. Japanese officials have repeatedly warned that they stand ready to intervene if currency moves become excessive. Yet the underlying fundamentals remain challenging for the yen.
Source: TN Trader
The Bank of Japan’s policy rate stands at 1%, its highest level since 1995, but remains well below US rates. This is fuelling the carry-trade whereby investors borrow cheaply in yen, leverage up, and buy higher-yielding assets, such as US equities. Intervention back in 2024 led to an unruly unwind of the carry-trade, with the effects felt outside of FX. For instance, the S&P 500 dropped 10%. Investors should be aware, in case it were to happen again.
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