The Japanese yen experienced significant volatility on Friday, following a sharp surge in the wake of unexpected drops in U.S. consumer prices for June. This development prompted speculation that Tokyo may have intervened to lift the currency from its 38-year lows.
The yen oscillated between gains and losses throughout Asian trading hours, settling at 158.90 per dollar after briefly spiking nearly 3% to 157.40 immediately following the CPI report on Thursday.
Sources from the Asahi newspaper, citing government insiders, suggested intervention by Japanese officials in the currency market. Concurrently, a Nikkei report, also citing sources, indicated that the Bank of Japan conducted rate checks with banks concerning the euro-yen exchange rate on Friday.
Masato Kanda, Tokyo’s chief currency diplomat, emphasized that authorities would take necessary action in the foreign exchange market, although he refrained from confirming any intervention.
The lack of official statements regarding intervention leaves investors speculating, with attention now turning to forthcoming data at month-end that will clarify whether such actions were indeed taken.
Charu Chanana, head of currency strategy at Saxo, noted the varied reactions of the yen to recent suspected interventions, suggesting that additional measures such as stern verbal intervention or policy adjustments at the BOJ’s July meeting may be necessary.
In April and early May, Tokyo intervened, expending approximately 9.8 trillion yen to bolster the yen. Despite these efforts, the yen subsequently reached a 38-year low of 161.96 last week, driven by the substantial interest rate differential between the U.S. and Japan.
This disparity has created an attractive environment for traders engaging in carry trades, borrowing yen at low rates to invest in dollar-denominated assets for higher returns.
“Today is expected to be volatile, with markets cautious about potential intervention, although the allure of the carry trade remains strong for shorting the yen,” said Chanana of Saxo, highlighting the persistent appeal despite recent economic shifts.
The yen’s surge was triggered by Thursday’s data indicating a decline in U.S. consumer prices for the first time in four years, reinforcing expectations of disinflation and the possibility of a Federal Reserve interest rate cut.
Tom Hopkins, senior portfolio manager at BRI Wealth Management, interpreted the CPI report as boosting market confidence towards a potential rate cut in the near future, aligning with expectations of a 25 basis point reduction by September.
According to the CME FedWatch tool, traders are now pricing in a 93% probability of a rate cut in September, up from 73% prior to the CPI release, with expectations of a total easing of 61 basis points by year-end.
In response, the U.S. dollar has remained under pressure, as indicated by the dollar index measuring its performance against six major counterparts, which hovered near a one-month low of 104.38 observed on Thursday.
The euro traded just below its one-month high against the dollar at $1.087325, while sterling, supported by stronger-than-expected UK economic growth data for May, maintained its position near a nearly one-year high of $1.2922.
