Forex
Next Bank of Japan intervention may be to sell yen :Mike Dolan
By Mike Dolan
LONDON (Reuters) -If Japan’s government is thinking ahead, it may be planning to rein in its errant yen rather than propping it up.
A two year cat-and-mouse game between speculators and Japan’s authorities – involving mounting bets against the yen on yawning interest rate gaps with other G7 economies – ended this month with the cat licking its lips, even while suffering some indigestion.
The yen’s slide to near four-decade lows, which played no small part in the exit of another Japanese prime minister this week, drew months of government warnings and then eventually periodic bouts of yen-buying intervention by the Bank of Japan.
But when the BOJ finally lifted interest rates again on July 31 and warned of more to come, it popped the “carry-trade” bubble and the currency turned violently – sparking an eye-watering but brief spasm of stock market volatility in Tokyo and around the world.
Job done?
There’s a body of opinion that thinks it may end up working a little too well.
Harking back to long stretches of recent history in which the BOJ was either buying or selling yen every two to three years to corral its moves, there’s every chance the currency quickly overshoots again on the strong side.
No less than Nomura, Japan’s biggest brokerage, raised the very prospect before last week’s blowup.
“We may need to start considering potential FX interventions by the MOF (Ministry of Finance) to limit the yen strength rather than weakness,” its macro research team told clients on Aug. 2, adding that wasn’t yet its “base case.”
“Intervention history tells us that after the yen buying interventions, there followed yen selling interventions to limit the yen strengthening too much.”
TENDENCY TO OVERSHOOT
And until about 10 years ago at least, that was indeed the routine pendulum swing.
The most celebrated currency intervention episodes were the collective G5 and G7 forays in 1985 and 1987 – with the former Plaza Accord to weaken the dollar followed two years later by the Louvre Accord to shore up the greenback. Dollar/yen was at the heart of those swings.
But yen-specific interventions by Japanese authorities alternately saw official buying and selling of yen at extremes between 150 and 75 per dollar every few years for the two decades after the property bust of the 1990s.
The extremes of Japan’s low interest rates since that crash and the resulting inflation and deflation of speculative carry trades paved the way for the volatility and overshoots in both directions during that period.
The routine “ebb” was yen weakness and the “flow” was exaggerated snapbacks in times of stress or volatility as carry trades were popped, or Japanese investors fled repatriated overseas investments. And that was a key reason the yen behaved as a “haven” during any market shocks of that period – something that compounded the moves into the mix.
But after the 2007-2008 Great Financial Crisis a decade ensued where interest rates in virtually all the Group of Seven members gravitated close to Japan’s zero level – smothering carry-trade temptations and allowing a relatively stable yen exchange rate to effectively sideline the BOJ’s hyperactive currency desk.
In fact, there was no confirmed intervention between the extraordinary earthquake and tsunami shock of 2011 and 2022 – when the post-pandemic, post-Ukraine invasion interest rate spikes elsewhere isolated Japan back at the zero level once again – refiring the carry trade into the bargain.
The wild swings of the past few weeks are just a reminder of the currency’s inherent tendency to overshoot.
NORMALIZED YIELD GAPS?
Spin ahead, and it’s not hard to see where a burst of yen strength might come from here. As U.S. and other G7 policy rates finally tumble and the carry trade clears out, Japan may feel emboldened to “normalize” further – increasingly confident its decades of post-1990 deflation are over.
Even though markets now think Tokyo may be even more wary of raising interest rates again for fear of upending the stock market as happened earlier this month, the latest GDP update may be encouraging, a new prime minister will be in town soon and the U.S. Federal Reserve will likely start cutting rates next month anyhow.
Two-year benchmark Japanese bond yields have recoiled back below 30 basis points from 15-year highs close to 50 bps at the start of the month. Given that alone, any suggestion of higher rates will warrant a significant repricing.
But the yield gap with the rest of the G7 already has been waning.
Two-year spreads versus U.S. Treasuries have fallen by 1.1 percentage points in just over three months, with the dollar/yen only reacting with a three-month lag to that turnaround. It would take another 1.7 point squeeze of that spread to get back to a 10-year average – and that could happen relatively quickly if it’s coming from both sides.
Fear of Donald Trump’s broad trade tariff pledges if the Republican former U.S. president wins the Nov. 5 election could be another reason for Japan to hold fire for a bit. But Trump is no longer the favorite in either opinion polls or betting markets.
While another move to hike rates could be partly self-defeating if yen strength hits exporters and the wider Japanese economy, the flipside of currency strength is lower import prices that allow more significant real wage rises to deliver the holy grail of domestic consumption growth.
But if yen strength goes too far too fast – then there’s always intervention to calm it down.
The opinions expressed here are those of the author, a columnist for Reuters.
(by Mike Dolan X: @reutersMikeD; Editing by Paul Simao)
By Chuck Mikolajczak
NEW YORK (Reuters) -The euro slumped to a two-year low while the dollar gained on Friday after gauges of business activity were released in each region, while bitcoin again hit a record high as it continued its march toward the $100,000 mark.
HCOB’s preliminary composite euro zone Purchasing Managers’ Index, compiled by S&P Global, sank to a 10-month low of 48.1 in November, below the 50 level that marks expansion from contraction, and the 50.0 estimate.
In addition, Britain’s PMI fell to 49.9 in November, from 51.8 in October. The government’s plan to increase taxes on businesses contributed to the first contraction in private sector activity in over a year, adding to recent indications the economy was losing steam.
But in contrast, S&P Global said its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, increased to 55.3 this month, the highest level since April 2022, after a 54.1 reading in October, with the services sector proving the bulk of the increase.
“It highlights the two-track world. It’s U.S. versus the rest, but even within the U.S. it’s services versus manufacturing,” said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.
“How long can U.S. services make up for the drag from everything else?”
The , which measures the greenback against a basket of currencies, rose 0.41% to 107.50, with the euro down 0.54% at $1.0416 after falling to $1.0333, its lowest since Nov. 30, 2022. The greenback was on track for its third straight weekly advance.
continued its recent rally toward the $100,000 mark that has seen the cryptocurrency surge more than 40% since the U.S. election on expectations President-elect Donald Trump will loosen the regulatory environment for cryptocurrencies. Bitcoin was last up 1.44% at $98,496 after hitting a record $99,697.17.
Investors have scaled back expectations for the path of interest rate cuts from the Federal Reserve recently, currently pricing in a 52.7% chance of a 25 basis point cut at the Fed’s December meeting, down from 69.5% a month ago, according to CME’s FedWatch Tool, as they assess the impact of legislative policies by the Trump administration, such as tariffs, on the economy.
Other central banks such as the European Central Bank and the Bank of England are seen as likely to become more aggressive in cutting interest rates to buttress their economies.
Sterling weakened 0.49% to $1.2528 and was on track for its second straight weekly decline.
Some of the European Central Bank’s most influential policymakers urged the European Union to bring back long-stalled economic integration to protect its model of prosperity from a looming trade war with the United States.
Investors are waiting for Trump to name a Treasury secretary. The Wall Street Journal reported on Thursday that Trump floated the idea of appointing Kevin Warsh, a former member of the Fed’s board of governors, to the post, with the understanding that he could later become Fed chair.
Against the Japanese yen, the dollar strengthened 0.12% to 154.69. The yen had fallen below 156 per dollar last week for the first time since July, sparking the possibility that Japanese authorities may again take steps to shore it up.
Japan’s annual core inflation was 2.3% in October, keeping pressure on the central bank to raise its still-low interest rates.
Just over half of economists in a Reuters poll believe the Bank of Japan would hike in December, in part because of concerns about the depreciating yen in the midst of an improving economy.
Investing.com – The US dollar retreated Monday, handing back some of its recent gains as Donald Trump’s pick for US Treasury Secretary appeared to reassure the bond market, while the euro rebounded from the two-year low seen last week.
At 05:05 ET (10:05 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.6% lower to 106.892, having hit a two-year peak on Friday.
Dollar slips after Trump nomination
President-elect Donald Trump nominated fund manager Scott Bessent to be his Treasury Secretary on Friday, and this has been welcomed by the bond market, with Treasury yields falling back.
However, Bessent has also been openly in favor of a strong dollar and has supported tariffs, suggesting any pullback in the currency might be short-lived.
“We are not sure whether the recent bullish flattening in the US Treasury curve represents the market seeing him as a ‘safe pair of hands’, but he certainly does not sound like someone who will be pushing President-elect Donald Trump into weak dollar policy,” said analysts at ING, in a note.
The main economic focus this week will be Wednesday’s , the Federal Reserve’s preferred gauge of underlying inflation.
This “is expected at a little sticky 0.3% month-on-month and will keep the market guessing over whether the Fed will cut in December after all,” ING added.
Recent stubborn inflation data has seen the Fed take a cautious stance towards further interest rate cuts.
Euro rebounds from two-year low
In Europe, traded 0.6% higher to 1.0476, moving away from Friday’s two-year low of 1.0332 after European manufacturing surveys showed broad weakness last week, while the US surveys surprised on the high side.
This economic weakness has markets pricing in more aggressive easing from the European Central Bank.
“The view here remains there is no fiscal calvary coming in the eurozone and that the only way to address the current malaise is for the European Central Bank to cut rates more quickly than usual,” ING added.
The ECB has cut rates three times already this year but investors now see a 50% chance it will cut by 50 basis points on Dec. 12 instead of the usual 25 given weak growth and rising recession risks.
rose 0.4% to 1.2576, rebounding from hitting a six-week low on Friday after UK disappointed, leading the market to price in an increased chance of rate cuts from the .
That said, Bank of England Deputy Governor Clare Lombardelli said on Monday she was more worried about the risk that inflation comes in higher – not lower – than the central bank has forecast.
“I view the probabilities of downside and upside risks to inflation as broadly balanced,” Lombardelli, making her first speech since joining the BoE in July.
“But at this point I am more worried about the possible consequences if the upside materialised, as this could require a more costly monetary policy response.”
Yen helped by drop in US yields
fell 0.2% to 154.41, after a 0.4% drop in the previous week. The currency pair tends to closely follow moves in Treasury yields, and had risen sharply in the past two months as the yen weakened.
“The Japanese yen is starting to show a little strength on the crosses. Helping that has been the shift in the fiscal-monetary policy mix,” ING added. “At the margin, Japanese fiscal stimulus is encouraging the view that the Bank of Japan will hike in December after all. Nearly 15bp of a 25bp hike is now priced.”
slipped slightly to 7.2447, after rising 0.2% last week.
Investing.com– Most Asian currencies inched up on Monday, while the Japanese yen firmed against the dollar as nomination of fund manager Scott Bessent as Treasury Secretary pulled U.S. bond yields lower and put the greenback on the backfoot.
slipped to 4.351%, as President-elect Donald Trump’s nomination of Bessent saw investors positioning for a more moderate head of the Treasury, especially on the topic of trade tariffs and immigration.
The was last down 0.5% at 106.950, after hitting a two-year peak of 108.090 on Friday. also eased.
The Japanese yen’s pair was 0.4% lower on Monday after a 0.4% drop in the previous week. The currency pair tends to closely follow moves in Treasury yields, and had risen sharply in the past two months as the yen weakened.
The Chinese yuan’s pair was largely flat after rising 0.2% last week, and the Malaysia ringgit’s pair fell 0.3%. The Australian dollar’s pair rose 0.4%.
Dollar loses ground after eight straight weeks of gains
The dollar retreated on Monday after surging for the past eight weeks. Bessent’s nomination as Treasury Secretary weighed on the dollar, amid some bets that he will be a voice of moderation in Trump’s administration.
Still, the dollar’s pullback could be temporary, given that Bessent has openly favored a strong dollar and has also supported trade tariffs.
The greenback is expected to remain supported by Trump’s policies, which are seen as inflationary, and are likely to result in higher-for-longer rates in the U.S. over the coming years.
Meanwhile, market participants also pared back bets for a quarter-point rate cut from the Federal Reserve in December to 52%, compared to 72% a month ago, according .
The (PCE) index, the Fed’s preferred measure of inflation, is scheduled for release the coming Friday, and is expected to provide more cues on interest rates.
Asian economic readings in focus
Singapore dollar’s pair was largely flat after the release of monthly consumer inflation numbers. Data showed that rose 1.4% in October from a year earlier, lower than a forecast of 1.8% due to a moderation in services, electricity and gas, and other goods inflation, official data showed on Monday.
The is scheduled to meet on Wednesday and is widely expected to cut interest rates by 50 basis points again. The New Zealand dollar’s pair rose 0.4% after sliding to a one-year low on Friday.
The Indian rupee’s fell 0.2%, remaining close to recent record highs. India is set to release its third-quarter on Friday.
China will release data for November on Saturday. Before that, data from China is due on Wednesday.
South Korea’s pair was 0.2% lower. The Bank of Korea is set to decide on on Wednesday, and could potentially trim rates further.
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