Instant View: Japanese Yen Surges, Alarm Bells Are Ringing

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(Reuters) – The Japanese yen rose almost 3% on Thursday, posting its biggest daily gain since tardy 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.

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But the scale and speed of the move put traders on alert for possible Japanese intervention. 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.

COMMENTS:

CHRIS SCICLUNA, HEAD OF ECONOMIC RESEARCH, DAIWA CAPITAL MARKETS, LONDON

“MOF won’t confirm this for some time, but the scale of the move gives a strong impression that it was proactive and used the US CPI data to take action.”

HELEN GIVEN, FX TRADER, MONEX USA, WASHINGTON DC

“For the past few months, investors have speculated that any potential intervention by Japanese currency officials could be financed by selling US Treasuries, so any significant decline in the rate would have a greater impact on the JPY than on other G10 currencies.

“Of course, it remains to be seen whether today’s big move in the JPY will last into the week ahead, but it is certainly good news for the BoJ as speculation about whether and when they might intervene to defend the weakening currency has plagued markets for a month now.”

SAMEER SAMANA, SENIOR GLOBAL MARKETS STRATEGIST, WELLS FARGO INVESTMENT INSTITUTE, CHARLOTTE, NORTH CAROLINA

“The CPI does what it does, so it’s hard to separate the two. Given that the bulk of the movement was around the time the CPI was released, I would say it’s more CPI than intervention. It’s possible they did something overnight.”

GEOFF YU, SENIOR MACRO STRATEGIST, BNY MELLON, LONDON:

“In our view, interest rate differentials are clearly converging as a September (U.S.) rate cut is already priced in.”

“Hard data also shows that yen short positions are at their strongest in almost three years and quite extreme, so there is no resistance to the upside.”

MARC CHANDLER, CHIEF MARKET STRATEGIST, BANNOCKBURN GLOBAL FOREX, NEW YORK

“I would be surprised if that were the case, partly because of the time zone and partly because the dollar is responding to fundamentals in the way you would expect – lower CPI, lower U.S. interest rates and of course the dollar falling against the yen… I think the market has been caught going in the wrong direction.”

“I think there are three general conditions. Volatility, and volatility is not very high, it was not there today. Second, I think they want a one-way market, and it has not been a one-way market for the past few weeks. And third, I think how the dollar responds to fundamentals, and it responds in line with fundamentals. So those three general conditions are not met in my opinion.”

GIUSEPPE SERSALE, PORTFOLIO MANAGER, ANTHILIA, MILAN

“The yen is currently making fireworks. I honestly can’t say what exactly is driving it. If the move continues, it could mean that the short-term positioning was too tilted towards shorting the yen. And this US data has created a situation where there has been a sharp rebound and a series of stop losses for those who are shorting the yen.”

“But if the movement weakens, halves during the day or becomes very erratic, then that means there was also a contribution from the Japanese Treasury, which they are not admitting at the moment… but the movement seems excessive because the euro is gaining half a point, the pound is gaining half a point and so on. So I have the impression that there is also some contribution from the Japanese.”

JAMES MALCOLM, HEAD OF FX STRATEGY, UBS LONDON:

“In my opinion this is not an intervention.”

“The idea is that the market position is so, so extensive that it can very, very easily become self-reinforcing. Whether you think it should stabilize, if the dollar/yen falls and you’re long, you have to get out… that’s the definition of a classic carry unwind.”

“There is motivation to possibly do a small intervention later in the day to make sure it doesn’t rebound.”

KENNETH BROUX, DIRECTOR OF CORPORATE RESEARCH, FX AND RATES, SOCIETE GENERALE

“It’s certainly a big change, but I don’t think we can say it has anything to do with intervention,” said Kenneth Broux, head of corporate, currency and interest rate research at Societe Generale (OTC:)

“The US CPI has been a trigger, and the idea is to stop it rather than intervene,” he said.

STEVE ENGLANDER, DIRECTOR, GLOBAL G10 FX RESEARCH AND NORTH AMERICA MACRO STRATEGY, STANDARD CHARTERED BANK NY BRANCH, NEW YORK

“Obviously, the yen story has been the interest rate differential story, and positions — long dollar/yen positions — have been building up. So when you get a number that’s so definitive in terms of making, let’s say, September very likely and in some sense reestablishing the disinflation story, that interest rate differential story is eroded. It was most likely a clearing of positions because my feeling from clients, especially short-term traders, is that everyone had some long dollar/yen positions that they thought might be heading toward 165 or higher.”

“There’s some vague speculation about intervention, it’s just that everyone looks at the price chart and says, oh, that’s it, that’s kind of a sharp drop, so maybe that’s what happened. The answer is it could have, but I would say it’s most likely squaring the position, not any official moves.”

LEE HARDMAN, SENIOR FX STRATEGIST, MUFG, LONDON

When a market is heavily positioned in one direction and then moves in the other direction, it can cause this kind of sudden move. The dollar/yen long positioning was very stretched

COLIN ASHER, SENIOR ECONOMIST, MIZUHO, LONDON

“This is most likely just a short-covering exercise as speculation about US interest rate cuts on the horizon grows following the negative CPI reading.”

“this is the pair of G10s where positioning is most stretched.”

“This is certainly a significant move, and the intraday range is the largest since the intervention in early May.”

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