By Ankur Banerjee and Rae Wee
SINGAPORE (Reuters) – Japan appears to have bought some time and respite from a falling yen with its latest bursts of suspicion, but it has also set itself up for a protracted war with a market that sees the currency as a force sell, analysts say. .
Traders estimate that the Bank of Japan (BOJ) spent nearly $59 billion defending the currency this week, putting the yen on track for its best weekly performance in more than a year.
The Japanese currency is up 5% from a 34-year low of 160.245 that it plunged to on Monday. Tokyo has not yet confirmed that it has intervened.
But this week’s rally has been anything but linear in a market that has been decidedly bearish on the currency, given the huge gap between ultra-low rates and those in other major economies.
The yen has swung wildly during the suspected intervention periods, gaining almost 5 yen in minutes and quickly losing some of it.
“Nothing has really changed,” said Rob Carnell, head of Asia-Pacific research at ING. “I think this has provided a temporary pause in what will inevitably be another test by the markets, who will see this as free money as they take on the BOJ….”
Carnell says the yen has become “a trader’s dream” because they can easily make money by simply buying dollars for the yen, waiting for the pair to rise and then selling it when the BOJ steps in to strengthen the yen to support.
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“You’d be crazy not to test it, knowing that at some point they’re going to intervene,” he said.
Before this week’s suspected forays into the market, Japanese authorities last intervened between September and October 2022, spending around $60 billion to defend the currency.
The yen was then trading at almost 152 per dollar, but within two months of that intervention it was falling again. It had lost 20% more of its value against the dollar when it hit 1990 lows this week.
“Because of the wide interest rate differentials, speculators will still be on the other side of this trade,” said Kaspar Hense, senior portfolio manager at BlueBay Asset Management.
The difference between the yield on ten-year US government bonds and the yield on Japanese government bonds is almost 4 percentage points.
NO OBJECTIVES
Ben Bennett, Asia-Pacific investment strategist at Legal And General Investment Management, says Japan’s finance ministry, whose mandate is to manage the yen, is well aware of how monetary institutions relate to the yen and is only acting to limit the rate of depreciation.
“Intervention comes at a cost, and I think the MOF would not be willing to throw money at a specific target,” he said.
Even after the BOJ exited negative rates in March, the yen remains the cheapest major currency to borrow and sell short, sealing its fate.
Analysts say this complicates forecasts for the yen, but it appears the 160 level is one the BOJ wants to protect.
Hirofumi Suzuki, chief currency strategist at Sumitomo Mitsui (NYSE:) Banking Corporation in Tokyo, believes Japanese authorities consider the decline after their March meeting “speculative and unacceptable” and may aim to bring the yen back to 155, against a dollar where it used to be. before that important policy decision.
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Yujiro Goto, head of currency strategy for Japan at Nomura, believes authorities just want to help their importers get the dollars they need.
“I think 150 is ideal for Japanese importers. I think MOF probably wanted around 152-152.50, but it didn’t reach that level, so there is a risk that MOF will come back for another round.”
Speculators also realize that the government’s war chest is not bottomless. Japan has about $1.3 trillion in foreign exchange reserves, but only about $155 billion in dollar deposits is liquid.
Meanwhile, Federal Reserve rate cuts are easing as the U.S. economy and labor markets remain warm. Speculative short yen positions have surged to their largest in 17 years.
Fred Neumann, chief Asia economist at HSBC, says Japan is merely trying to end asymmetric one-sided speculation, rather than defending any level of the yen.
“Given the reality of longer interest rates in the US, this is an exercise in expectations management. It is not one that should necessarily lead to a rapid appreciation of the yen,” he said.
($1 = 152.8600 yen)
