EBC Markets Briefing | Yen extends strong rally as bears retreat

The Japanese yen climbed to fresh 7-month highs ​on Tuesday despite that the Asian country's foreign reserves have fallen at their fastest pace since ministry records started in 2000.

Interventions never gave the yen lasting support. However, short-sellers are now completely rethinking their long-term strategies due to capital repatriation, unwinding carry trades, and political pressure from the US.

The BOJ is expected to lift its key rate by 25 bps this month and markets are also contemplating the possibility of a 50-bps hike or a series of rapid increases in coming months.

Citigroup data shows a dramatic shift in yen positioning, which flipped from bearish to bullish at the start of August. The currency has been struggling on fiscal stimulus and policymakers' wait-and-see approach.

Japan's services sector expanded at its fastest pace in five months last month, as stronger domestic demand ​lifted business activity and new work, a private survey ‌showed.

Driven by strong corporate earnings and a tight labour market, Japanese workers' nominal wages surged at their fastest pace in nearly 30 years; Q2 GDP has been revised up on slight capex improvement.

The yen entered overbought territory, but there were few signs of a significant pullback. The immediate upside focus shifts towards the late-July spike-high wick near 152.47 per dollar.

Asset Recap

As of market close on 7 September, among EBC major products, WTI crude led gains as the US and Iran traded strikes over the weekend, ratcheting up tensions in the Middle East.

Analysts and traders state that a perfect storm of economic and political factors is reversing the yen's long decline, forcing bearish investors to exit their positions.

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