Intervention Rumors and a Weakening Currency
The Japanese yen experienced a dramatic surge after hitting a three-decade low against the US dollar. This volatility sparked speculation of potential intervention by the Bank of Japan (BOJ) to stabilize the currency.
Following a two-day meeting, the BOJ maintained its interest rate target at 0-0.1% and slightly revised its inflation forecast upwards. While investors anticipated this decision, it reinforced the notion that significant policy changes are unlikely in the near future.
BOJ Governor Kazuo Ueda downplayed the impact of the weak yen on inflation trends. However, the yen continued its downward spiral, reaching its lowest point in almost 16 years against the euro and nearly a decade against the Australian dollar.
Analysts believe the BOJ is unlikely to raise interest rates in the short term, further fueling the yen carry trade. This strategy involves borrowing yen at low interest rates and investing in higher-yielding currencies, leading to further depreciation of the yen.
The widening gap between US and Japanese government bond yields, currently exceeding 375 basis points for the 10-year tenor, is a major driver of the yen's weakness. This disparity incentivizes borrowing yen and selling it to invest in dollar-denominated assets with higher returns.
Should the US core PCE price index, the Federal Reserve's preferred inflation gauge, rise in upcoming data, the yield gap could widen further, exacerbating pressure on the yen.
Market participants anticipate intervention from the Japanese authorities if the yen continues its upward trajectory. Finance Minister Shunichi Suzuki has expressed close monitoring of currency movements and readiness to take necessary actions.
However, traders remain skeptical about the effectiveness of intervention, given the current interest rate environment and strong momentum against the yen.
Meanwhile, the yen's depreciation has boosted the Australian and New Zealand dollars. The Aussie is poised for its largest weekly gain in five months, fueled by a surprisingly strong inflation report. The kiwi has also experienced its most significant weekly gain in nearly two months.
In contrast, the euro and sterling remained stable, holding onto gains made earlier in the week following data indicating slower US economic growth.