(Bloomberg) — The yen wobbled in holiday-thinned market conditions, breaking through 160 per dollar to its weakest level in 34 years before recovering sharply and speculative authorities possibly intervened.
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The Japanese currency fell as much as 1.2% to 160.17 per dollar early Monday before moving in the other direction, gaining more than 2%. The moves, which came amid low liquidity due to a local holiday, could also be a sign that nervous traders are balancing the prospects of official intervention with the risks of hawkish comments from the Federal Reserve later this week.
Japan’s top foreign exchange official Masato Kanda said he had “no comment at the moment” when asked by reporters whether or not he had intervened in the foreign exchange market.
“The market is very choppy and without a lot of liquidity the yen becomes an interesting toy,” said Rodrigo Catril, a strategist at National Australia Bank. “The risk of an intervention is added.”
The rebound continued in early European trading, lifting the yen to 154.54, the day’s highest.
Some market participants attributed the sharp moves to poor trading conditions. Shoki Omori, chief strategist at Mizuho Securities Co., suspects that algorithm-driven accounts may be partly responsible. But others saw the hand of officials at work.
“The move has all the hallmarks of an actual BOJ intervention and there is no better time for it,” said Tony Sycamore, market analyst at IG Australia in Sydney. A Japanese holiday “means less dollar-yen liquidity and more profit for the BOJ’s money.”
Fed risk
The Federal Reserve is scheduled to hold a policy meeting where it may signal the need to keep interest rates high amid stubborn inflation – a move that would likely support the dollar and undermine the attractiveness of yen assets. However, behind the fundamentals pointing to a weaker yen is the risk that Japan will intervene to support the currency, as it did in 2022.
“Should there be no intervention, it would be dangerous to catch a falling knife, especially as the Fed is likely to signal a longer wait for cuts,” said Fiona Lim, senior strategist at Malayan Banking Bhd. “The momentum for the dollar is definitely there.” The yen will move decisively above 160 and markets are testing Japan’s tolerance for a sharp yen decline.”
The Bank of Japan indicated last week that financial conditions will remain loose, although policymakers have repeatedly warned that devaluation will not be tolerated if it goes too far too quickly. Earlier this month, the country’s treasury secretary also expressed concern to U.S. Treasury Secretary Janet Yellen about the yen’s decline, which market participants said laid the groundwork for intervention.
Japan’s Kanda gave an example of a 10 yen move within a month as a quick move. The Japanese currency has weakened by as much as 8 yen per dollar over the past month, but fell over 2% last week alone and is down more than 10% since the start of the year.
One reason for Japan’s apparent reluctance to act may be that intervention alone cannot change the wide gap in interest rates that is partly responsible for the yen’s decline. Although the BOJ has brought local interest rates out of negative territory, they are still far from levels that would discourage investors from higher yields in the U.S. and other countries.
“The current pace of devaluation is slower than in 2022, so the intervention response may be less intense,” wrote Vincent Chung, deputy portfolio manager at T. Rowe Price. “Furthermore, market participants have priced in the possibility of authorities intervention after the BoJ meeting in May, as shown by option prices.”
Yen watchers are wondering when Japan will intervene as the decline accelerates
Options market bets helped worsen the yen’s fall on Monday, with barriers against the dollar and euro targeted as intervention risks were likely to be low during a holiday in Japan, Asian traders said. Against the euro, the yen fell above 170 on Monday to its weakest level since the common currency was introduced, before regaining ground.
“The pressure on the currency will remain until we get weaker growth and inflation data in the U.S. and a clearer hawkish turn from the BOJ,” said Homin Lee, senior macro strategist at Lombard Odier in Singapore. “Given the recent rhetoric about excessive FX market movements, we still believe we are fairly close to Treasury intervention.”
– With assistance from Michael G. Wilson, Matthew Burgess, Erica Yokoyama and Emi Urabe.
(Updates the levels.)
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