The yen extended its losses, erasing half of the gains triggered when authorities from the US and Japan intervened in the foreign-exchange market to support the currency.
Japan’s yen weakened as much as 1% to touch 159.35 per dollar, marking the worst performance among Group-of-10 peers on Monday. Those declines wiped out half of the yen’s recent intervention rally, a psychologically significant move for traders who remain on alert for further official support.
“Without fresh intervention, it will continue to drift lower,” said Lee Ferridge, a strategist at State Street. “It seems that the market is disappointed that we didn’t see more intervention.”
Around the turn of the month, Japan and the US carried out their first coordinated yen-buying intervention since 1998, helping to lift the yen from near a four-decade low. The currency was trading as weak as about 164 per dollar in late July, then surged to a peak of 155 after the joint support in early August.
Authorities likely used around $34 billion intervening in the currency market to support the yen on July 31, a Bloomberg analysis of central bank accounts indicates. The action came after authorities spent an estimated $53 billion the previous day, in what would likely be the largest single-day intervention on record if confirmed.
But since then, weakness has crept back into the currency as market participants refocus on underlying drivers. Wide interest-rate differentials with the US, concerns over Japan’s fiscal outlook and geopolitical uncertainty continue to weigh on the yen even as officials in Tokyo and Washington warn they are prepared to act again if needed.
“We think the relatively muted response to the intervention reflects the fundamental reasons for the currency’s weakness,” Goldman Sachs Group Inc. strategists including Kamakshya Trivedi wrote in a note. They expect “depreciation pressures to reemerge over time absent a shift in global conditions or a policy surprise.”
The reversal highlights the limits of intervention in changing the yen’s broader trajectory when the forces behind its decline remain largely intact. It also raises speculation that authorities would step in again to support the currency.
Some investors are wary that thinner-than-typical liquidity on Tuesday, when Japan observes a holiday, could create conditions favorable for further intervention. Nomura Securities Co. strategists including Yujiro Goto wrote in a note that market participants are left closely watching official commentary as “attention will remain on the intervention stance of Japanese and US authorities.”
What Bloomberg Strategists say…
“Yen intervention can clear out leverage and reset levels. But without a meaningful compression in rate differentials, or enough volatility to make carry materially less attractive, the same forces that drove yen weakness hold true.”
—Brendan Fagan, Macro Strategist, Markets Live
For the full analysis, click here.
To Alex Cohen, a foreign-exchange strategist at Bank of America, a stronger yen would take either a “more forceful” intervention or signals that the Bank of Japan will raise interest rates in September.
While the BOJ left rates steady when it met at the end of July, Governor Kazuo Ueda at his post-decision briefing took a generally hawkish tone and emphasized that he saw greater upside risks to the price outlook. A summary of opinions from that meeting showed officials flagged rising risks of inflation, with one board member pointing to the possibility of an acceleration in the pace of interest rate hikes.
Traders were pricing about a 63% chance of an increase by September, with an October move almost fully priced.
“I’m skeptical we can see a much stronger yen unless it is followed up by stronger policy action,” said Paresh Upadhyaya, a strategist at Pioneer Investments. “A September rate hike is just not enough.”
With assistance from Georgia Hall.
This article was generated from an automated news agency feed without modifications to text.
