LONDON (Reuters) – The Japanese yen rose almost 3% on Thursday in its biggest daily gain since late 2022, a move local media attributed to a round of official buying to prop up a currency at its lowest level in 38 years has languished.
The dollar fell as low as 157.40 immediately after data showed US consumer inflation cooled more than expected in June.
Still, the size and speed of this move left traders alert to the possibility of Japanese intervention. The authorities intervened in early May to strengthen the yen.
Local Japanese television channel Asahi, citing government sources, said officials were intervening in the foreign exchange market.
Domestic news service Jiji quoted top currency diplomat Masato Kanda as saying he could not comment on whether or not an intervention took place, but that recent moves in the yen were “not in line with fundamentals.”
Japan’s Finance Ministry, which has made it standard practice not to comment on currency market activity, and the New York Federal Reserve were not immediately available for Reuters requests for comment.
Several currency analysts and traders initially said they believed the yen’s rise was likely driven by options-related activity after the consumer price report that reinforced the Federal Reserve’s case for cutting rates as early as September.
But as the yen strengthened, others said the move bore the hallmarks of official purchases.
“The MOF won’t confirm this for some time, but the scale of the move gives a strong impression that it has been active and taken advantage of the post-US CPI data to take action,” said Chris Scicluna, head of economic research at Daiwa. Capital markets in London.
Investors have sold the yen relentlessly for months given Japan’s much lower interest rates than anywhere else, leading to a build-up of bearish positions in the Japanese currency that some may have been forced to unwind.
The dollar last traded at 158.70 yen, down 1.8% on the day, the lowest since mid-June.
The gap between US and Japanese interest rates has created a highly lucrative trading opportunity, where traders borrow the yen at low rates to invest in dollar-priced assets for higher returns, known as a carry trade.
ROLLERCOASTER MARKETS
Thursday’s US inflation data increased the likelihood that this gap would narrow more quickly.
The futures market shows that traders are now fully anticipating a Fed rate cut in September and an easing of roughly 60 basis points by the end of the year, compared to about 45 basis points earlier this week, undermining the dollar.
“The point is that the market position is so extensive that it can very easily feed itself,” says James Malcolm, head of FX strategy at UBS and veteran Japan watcher.
“Regardless of whether you think the rate should stabilize, if the dollar-yen falls and you are long, you should get out… that is the definition of a classic carry-unlax.”
The yen strengthened across the board, sending the euro down 2% to 171.60 yen, while sterling fell 1.4% to 204.72 yen. The Australian dollar fell to 107.50 yen.
The latest weekly data from the US regulator shows speculators making bets on the yen worth $14.26 billion, not far from a 6.5-year high in April, according to LSEG data.
Theoretically, the larger a bearish position is, the greater the room for investors to change course, which in this case would boost the yen against the dollar.
