LONDON (Reuters) – The Japanese yen rose almost 3% on Thursday, posting its biggest daily gain since delayed 2022. Local media attributed the move to a round of official purchases aimed at supporting the currency, which is at a 38-year low.
The dollar fell to 157.40, just after data showed U.S. consumer inflation fell more than expected in June.
But the scale and speed of the move put traders on alert for potential intervention by Japan. Authorities intervened only in early May to shore up the yen.
Local Japanese TV station Asahi, citing government sources, reported that officials intervened in the currency market.
National news agency Jiji quoted top currency diplomat Masato Kanda as saying he could not comment on whether there had been an intervention but that the yen’s recent movements were “not in line with the fundamental assumptions”.
Japan’s Finance Ministry, which has a policy of not commenting on currency market activity, and the Federal Reserve in New York did not respond to Reuters’ request for comment.
Several analysts and currency traders initially said they believed the yen’s rally was likely driven by activity in the options market following a consumer price report that bolstered the Federal Reserve’s case for a rate cut in September.
But as the yen strengthened, others began to argue that the move amounted to official buying.
“It will take some time for the Treasury to confirm the information, but the scale of the move suggests it was proactive and used the US Consumer Price Index (CPI) data to take action,” said Chris Scicluna, head of economic research at Daiwa Capital Markets in London.
Investors have been relentlessly selling the yen for months, given that interest rates in Japan are much lower than elsewhere, leading to a build-up of bearish positions in the Japanese currency, some of which have been forced to exit.
The dollar last traded at 158.70 yen, down 1.8% on the day and its lowest level since mid-June.
The difference in interest rates between the U.S. and Japan has created a very lucrative trading opportunity where investors borrow yen at low interest rates to invest in dollar-denominated assets and earn higher returns. This is known as a carry trade.
ROLLERCOASTER MARKETS
US inflation data released on Thursday raised the chances of narrowing the gap more quickly.
Futures markets show investors expect the Fed to cut interest rates in September and ease monetary policy by about 60 basis points by the end of the year, up from about 45 basis points earlier this week, weakening the dollar.
“The thing is that the market position is so extensive that it could feed off of itself very, very easily,” said James Malcolm, head of currency strategy at UBS and a seasoned Japanese market observer.
“Regardless of whether you think it should stabilize, if the dollar/yen is falling and you are long, you have to get out… that is the definition of a classic carry unwind.”
The yen strengthened across the board, leaving the euro down 2% to 171.60 yen, while the pound fell 1.4% to 204.72 yen. The Australian dollar, which fell to 107.50 yen.
The latest weekly data from the U.S. regulator shows speculators are betting on a $14.26 billion decline in the yen, which is just above April’s 6-1/2-year peak, according to LSEG data.
Theoretically, the bigger the bearish position, the more likely investors are to reverse course, which in this case would strengthen the yen against the dollar.
