The yen is advancing on three fronts

The yen is advancing on three fronts

• Rumours of changes to the GPIF’s portfolio structure, currency interventions and monetary tightening by the BoJ are bolstering the yen.

• Falling Treasury yields and a weakening dollar are lending a helping hand to the ‘bears’ on USDJPY.

The US dollar was forced to retreat against a backdrop of falling Treasury yields and the probability of the Fed tightening monetary policy in September falling from 70% to 62%. ADP’s private sector employment growth in August slowed from 44,000 to 38,000, falling short of forecasts. John Williams, President of the Federal Reserve Bank of New York, sees no need for monetary tightening at the upcoming FOMC meeting.

The strengthening of the yen contributed to the USD index’s peak. The market received signals that the authorities in Tokyo want a stronger currency on several fronts. The fall in USDJPY was as rapid as during the spring and summer currency interventions. No one can say for certain whether there has been intervention in the forex market now or not.

The statement by Board Member Takata Hajima that the BoJ might consider an exceptional rate hike at its September meeting came as a bolt from the blue for the markets. Investors had been anticipating a 25 basis point monetary tightening, with the probability of this approaching 90%. The chances of a 50 basis point tightening of monetary policy are slim, and the rise in these odds triggered a sell-off in USDJPY.

Alongside rumours of currency interventions and aggressive rate hikes, news of an extraordinary meeting of the Japan Government Pension Investment Fund’s (GPIF) management in August played into the yen’s favour. This was the first such meeting to take place during a holiday month in seven years. As a result, market speculation intensified regarding a shift in the GPIF’s portfolio towards domestic bonds, whose yields have risen to their highest level since 1996. This will lead to a capital outflow and contribute to a fall in USDJPY.

The markets are convinced that when the US talks so much about interventions and rate rises, Japan has no choice but to act. At the same time, Scott Bessent is also pursuing his own self-interest. In his view, the Bank of Japan’s tightening of monetary policy will help stabilise not only the domestic but also the global debt market. Another positive factor for the yen is that the rhetoric of the US Treasury Secretary is easing the pressure from the Japanese government on the central bank.

The FxPro Analyst Team