The Yen’s Crazy Surge Threatened by Imminent Collapse: The Japanese yen, which has experienced a “crazy” surge, faces a significant threat of collapse in the near future.
The Bank of Japan (BOJ) and the Federal Reserve meetings will be crucial in determining the yen’s future trajectory.
The yen’s recent gains could vanish just as quickly if the BOJ does not raise interest rates.
However, unstable economic data and weak consumer spending may prevent the BOJ from making this move.
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Determining the Outlook for the Japanese Currency
Probability of Raising Interest Rates
Determining the Outlook for the Japanese Currency
The Japanese yen, which has experienced a “crazy” surge, faces a significant threat of collapse in the near future.
The Bank of Japan (BOJ) and the Federal Reserve meetings will be crucial in determining the yen’s future trajectory.
The yen’s recent gains could vanish just as quickly if the BOJ does not raise interest rates.
However, unstable economic data and weak consumer spending may prevent the BOJ from making this move.
Investor Bets
Investors have flocked to buy the yen recently,
betting that the interest rate differential between the United States and Japan will shift in favor of the latter.
They will face their moment of truth on Wednesday.
The yen is holding onto a nearly 5% gain against the dollar before it began rising on July 11,
a move bolstered by talk of BOJ intervention in the market. Some investors warn that the surge is fragile,
as evidenced by the yen’s quick retreat from gains after stronger-than-expected U.S. economic growth figures.
Probability of Raising Interest Rates
Swap markets indicate a 43% chance that the BOJ will raise interest rates by 15 basis points
by the end of its monetary policy meeting on July 31, signaling considerable caution.
Only 30% of BOJ watchers polled by Bloomberg expect a rate hike,
even though over 90% see it as a risk.
This makes yen bulls vulnerable, especially if the BOJ also disappoints expectations
with a significant reduction in bond purchases or if the Federal Reserve
does anything later that day to dampen hopes for U.S. rate cuts in the coming months.
The Crazy Rise
Nick Twidale of ATFX Global Markets, who has been trading the Japanese currency for a quarter of a century, said:
“This is a crazy rise for the yen.
The BOJ could spoil the party and not play its role in tightening policy.”
Twidale added that if the BOJ does not meet market expectations, carry trades,
which profit from interest rate differentials and have kept the yen weak,
“could come back strongly.” Others, from BlackRock to former central bank officials,
expect the BOJ to keep rates steady for longer.
Economic Data
Unstable economic data lends credibility to this view:
while a key index tracking the strength of Japan’s service sector rebounded in July,
a measure of factory activity contracted.
People familiar with the matter say weak consumer spending complicates the BOJ’s decision this week.
Market Expectations
Amir Anvarzadeh, a strategist at Asymmetric Advisors who has tracked Japanese markets for over thirty years, said,
“If the BOJ does nothing, the dollar could rise against the yen again.”
Nonetheless, the yen rose 0.2% to 153.62 against the dollar at 9:07 a.m.
in Tokyo, following a third month of accelerating inflation in the Japanese capital.
Demand for the Yen
After last week’s significant move, Nathan Sowell,
managing director of foreign exchange trading at Citigroup in Singapore,
saw additional demand for bullish yen options. He said:
“It’s still too early to tell if this signals a long-term shift in investor sentiment,
so it’s more likely to be a tactical shift in positioning or short-term hedging activity for now.”
State of Uncertainty
Other traders note that some hedge funds have stayed out of the market amid uncertainty
about how much the currency can gain before the BOJ’s policy meeting this week.
If the BOJ does not fully meet expectations,
The yen could weaken to 158 against the dollar, according to Rodrigo Catril of National Australia Bank.
Support for the BOJ’s Stance
However, even if the BOJ tightens policy on Wednesday,
there is still reason to support its stance in carry trades.
In these, investors use Japan’s ultra-low interest rates to borrow in yen and invest in higher-yielding currencies.
The yen’s implied yields would still be about 90 basis points
lower after a rate hike than those of the Swiss franc,
an alternative funding currency for carrying trades.
U.S. Interest Rate Risks
There are also many risks associated with U.S. interest rates.
If the chances of the Federal Reserve cutting rates diminish, the Japanese currency could face pressure again.
Charo Chanana, head of currency strategy at Saxo Capital Markets, said:
“The yen could test 160 if the Fed does not signal
rate cuts in September and U.S. data gains strength again.”
The Yen’s Crazy Surge Threatened by Imminent Collapse