Volatility in the JPY and USD/JPY

Recently, we've seen some significant changes in the Japanese yen (JPY), as it continues to strengthen against the US dollar (USD). Just today (25/07.24), the USD/JPY exchange rate took a noticeable dip, dropping to an intra-day low of 152.68. This was a substantial decrease from the high of 161.95 recorded on July 3rd, marking a 5.72% decline. It's the biggest drop since we saw a 5.2% decline in late April and early May. Back then, Japan stepped in to support the yen with a record purchase of around JPY 9.8 trillion. For context, interventions in September and October 2022 totalled about JPY 9.1 trillion. 

USDJPY Daily Chart 

 Source: Finlogix Charts The recent dip in USD/JPY appears to be linked to another round of intervention by Japan, which the Bank of Japan (BoJ) estimates at JPY 5.6 trillion last Thursday and Friday. This intervention was notably more cost-effective than previous efforts, suggesting a shift in Japan's strategy. The timing, just after a weaker-than-expected US Consumer Price Index (CPI) report for June on July 11th, points to a more proactive approach by Japan. In the past, interventions seemed more reactive, responding to rapid yen depreciation and USD/JPY crossing the 160.00 threshold.

This change in strategy has created uncertainty among market participants about the timing and scale of future interventions, leading to a reduction in elevated short JPY positions. Recent data from the International Monetary Market (IMM) indicated that short JPY positions held by Leveraged Funds were at their highest since November 2017 as of July 9th.

The correction in USD/JPY is also supported by a broader adjustment in US yields. The June US CPI report has reinforced expectations that US inflation is easing towards the Federal Reserve's (Fed) target, potentially paving the way for rate cuts. This outlook aligns with forecasts suggesting the Fed might start cutting rates in September, with multiple reductions anticipated in the second half of the year. 

The US rate market has already adjusted, pricing in around 63 basis points of cuts by the year's end, contributing to a continued decline in US yields since their peak in late April.

Meanwhile, the BoJ is expected to tighten its policy at its next meeting on July 31st. The Japanese rate market currently prices in around 4 basis points of hikes, significantly below expectations of a 15 basis points increase. Comments from Japan's Digital Transformation Minister Taro Kono, advocating for a rate hike to support the JPY and curb inflation, were rebuffed by Finance Minister Shunichi Suzuki. However, the government likely anticipates BoJ action to bolster the yen following recent FX market interventions.

Market participants are also closely watching potential changes to the BoJ's plans for Japanese Government Bond (JGB) purchases. Recent minutes from the BoJ’s "Bond Market Group" meetings suggested a possible acceleration in the reduction of JGB purchases, which could exert upward pressure on long-term Japanese yields, further supporting the yen.

Another factor influencing the yen has been recent comments from former US President Donald Trump. In an interview with Bloomberg Businessweek, Trump expressed concerns about the strong US dollar, which he claims is detrimental to the US manufacturing sector. He criticized Japan and China for allegedly weakening their currencies and hinted at imposing tariffs if they continue. Trump's comments, reminiscent of his stance during his first term, suggest a preference for a weaker USD/JPY. This stance could increase the likelihood of joint intervention by the US and Japan, especially if the Fed starts cutting rates as anticipated.

In summary, the recent volatility in the JPY and USD/JPY exchange rate has been driven by a combination of strategic interventions by Japan, adjustments in US yields, and evolving market expectations regarding central bank policies. These factors, along with geopolitical considerations, are likely to continue influencing the exchange rate dynamics in the near term.

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