The US dollar is approaching 152 against the yen, and the Japanese authorities have released a signal of intervention, strategists: only aggressive interest rate hikes can hold the yen
Reporter: Cai Ding Editor: Li Menglin
On the morning of Wednesday, March 27, Beijing time, the yen once touched 151.972 yen against the US dollar, hitting a new low since the bursting of Japan's asset bubble in July 1990, triggering market speculation that the Japanese authorities will increase intervention in the foreign exchange market. Earlier, Naoki Tamura, a hawkish member of the Bank of Japan and a member of the governor, said that the Bank of Japan must slowly but steadily normalize its ultra-loose monetary policy, and the accommodative environment in financial markets is likely to continue.
As the yen fell to a new 34-year low, Japanese Finance Minister Shunichi Suzuki warned on Wednesday morning Tokyo time that the authorities could take "deisive steps". Shunichi Suzuki said that after the yen fell, the Japanese government is closely monitoring market trends with a high sense of urgency.
Themistoklis Fiotakis, global head of FX and emerging market macro strategy at Barclays, pointed out in an email to the National Business Daily, "We believe that in the absence of a large rate cut by the Fed, only a more aggressive rate hike cycle in Japan relative to the current market pricing can provide lasting support for the yen." As interest rate differentials between the US and Japan remain wide, we expect USDJPY to remain in a range of 145 to 150. ”
The first interest rate hike in 14 years, why is the yen still "falling endlessly"?
Bloomberg reported that although the Bank of Japan raised interest rates for the first time since 2007 last week, various factors suggest that the yen is still under pressure to weaken. These factors include the fact that yield differentials between the U.S. and Japan remain elevated, with benchmark U.S. Treasury yields about 3.5 percentage points higher than benchmark JGB yields. This yield premium means that if this key spread does not change significantly, JPY-denominated US securities investment will remain profitable as long as USDJPY remains above 146.1.
Since then, the yen's decline has continued to this day. According to the Reuters report, the recent factors that have weighed on the yen also include the use of the yen in the carry trade. In a carry trade, investors borrow money with lower interest rates and then invest the proceeds in currencies with higher yields. In addition, Japanese investors can also earn much higher returns overseas, which prevents the yen from being supported by the repatriation of funds. Since the Bank of Japan announced the end of negative interest rates last week, the yen has fallen more than 1% against the dollar. The Japanese yen was the worst performing major currency in the year-to-date quarter, having lost 7.6% of its value against the dollar.
Aninda Mitra, head of Asia macro and investment strategy at BNY Mellon Investment Management, said in an email to the National Business Daily: "The sell-off in the yen after the Bank of Japan announced a rate hike last week highlights that the financing attribute of the yen still exists, but we are cautious about the yen's greater two-way risk and higher volatility going forward." We also don't see this as the start of a long BoJ rate hike cycle. Conversely, we believe the BOJ's excess reserve ratio (IOER) is likely to be around 0.1% at the end of the year, a bit lower than the 0.27% priced in by the swap market. ”
To make matters worse for JPY bulls, expectations of further weakening of the yen are becoming more and more entrenched among investors. Last week, the JPY 3-month basis swap closed at its highest level since January 2022 last week after the Bank of Japan pledged to remain accommodative while raising interest rates, suggesting that hedging demand is declining and underscoring rising expectations of a weaker yen.
Japanese money managers often use the 3-month basis swap on the yen as a hedging tool to prevent the appreciation of the local currency from eroding the value of overseas investments. Japanese funds seeking high returns overseas have had a tough few years as the yen has lost nearly a quarter of its value in recent years and it has become more expensive to buy assets overseas. Currency hedging costs have soared as Japan has maintained negative interest rates until this month and some central banks around the world have rushed to tighten policy to curb inflation. Signs of declining hedging demand suggest that local investors are less concerned about a sharp rebound in the yen.
Image source: Bloomberg
Earlier this day, Naoki Tamura, a member of the Bank of Japan's policy committee, said that the way monetary policy is managed is essential to achieve policy normalization slowly and steadily, and to end the super-massive monetary easing. Naoki Tamura was a former executive at a commercial bank and was seen by the market as one of the hawkish members of the Bank of Japan. Alternatively, options traders are keeping a close eye on whether USDJPY will hit the key level of 152, according to traders. Traders believe that a break above this resistance level could extend the decline in the yen, as investors with inverse call options will need to cover large short positions in USDJPY.
The authorities hinted at intervention, strategists: only aggressive interest rate hikes can support the yen
As the yen fell to a fresh 34-year low, Japanese Finance Minister Shunichi Suzuki said on Wednesday morning Tokyo time that the Japanese government is closely monitoring market trends with a high sense of urgency and may take "decisive measures".
Earlier this week, Masato Kanda, the top official in charge of monetary affairs in the Japanese government, also said that the current weakness of the yen is not in line with its fundamentals. Speaking to the media on Monday (March 25), he said, "We will take appropriate measures to deal with the excessive depreciation of the yen and do not rule out any options." ”
Kanda's remarks come close to the strongest warning the authorities have publicly issued in the past few years. Just last week, economists polled by Bloomberg still believed that Japan's monetary authorities would not intervene in the currency market for the time being. At the same time, a change in expectations about the timing of the Fed rate cut or the Bank of Japan to raise interest rates again could also change market dynamics.
The current yen exchange rate is hovering at the level of previous intervention by the Japanese authorities Image source: Bloomberg
In addition, Bank of Japan Governor Kazuo Ueda also said that the bank will also pay close attention to the exchange rate and its impact on the Japanese economy and price trends. In his speech to the Japanese Diet, he said, "Exchange rate movements are one of the factors that have a significant impact on the economy and prices. In economic terms, the depreciation of the yen will make Japan's imports more expensive, will exacerbate inflation, and make Japan's exports cheaper.
BofA believes that if the dollar reaches a range of 152 to 155 against the yen, the risk of government intervention will increase, while a Bloomberg survey of economists found that the exchange rate level that prompted the Japanese Ministry of Finance to intervene is estimated at 155.
At the moment, it is clear that the yen currency market is "in the wind": with the yen falling to a new 34-year low, not only has the risk of Japanese authorities intervening in the currency market increased significantly, but traders are panicking with nearly $3 billion of USDJPY options expiring.
According to Bloomberg, traders have sold $2.85 billion USD/JPY options expiring March 28 with a strike price of $2.85 billion. This is the largest year-to-date option expiration date for USDJPY with the Depository Trust and Clearing Corporation. If they need to hedge their positions, they will want as little volatility as possible, and Japan's Ministry of Finance's rhetoric has the potential to shatter that hope.
Ruchir Sharma, Global Head of FX Options Trading at Nomura International, noted: "Option sellers suffer losses from large volatility because they don't earn enough premium to cover the cost of hedging spot volatility. Large-scale short option exercises will require traders to hedge their spot exposure, which can lead to disruptive price action as they all need to hit the market at the same time, which can further exacerbate their losses. ”
In the three weeks since the beginning of the year, the US dollar has risen by 5.5% against the yen Image source: Oriental Fortune
In fact, since the beginning of this year, the yen has repeatedly made traders anxious. Many hedge funds started buying options in 2024, which would have increased in value if the dollar fell against the yen, but the dollar had risen as much as 5.5% against the yen in the three weeks since the start of the year. Earlier this month, they re-entered a similar position on speculation that the yen would strengthen following the BoJ's rate hikes, however, the yen fell sharply as the BoJ pledged to remain accommodative.
Regarding the yen exchange rate, Themistoklis Fiotakis, global head of foreign exchange and emerging market macro strategy at Barclays, pointed out in an email to the reporter of the "Daily Economic News" that although the Bank of Japan ended its ultra-loose monetary policy as expected, the yen hit a new low for the year immediately afterward. "In our view, with no expectations of a large rate cut by the Fed, only a more aggressive rate hike cycle in Japan relative to current market pricing can provide lasting support for the yen. As interest rate differentials between the US and Japan remain wide, we expect USDJPY to remain in a range of 145 to 150. Fiotakis wrote.