Yen intervention sends shockwaves through FX markets

Yen skyrockets amid FX intervention

The US dollar fell across the board yesterday, driven mainly by the sharp and massive drop in dollar/yen, which raised eyebrows and suspicion of intervention. The second biggest winners, but far behind the yen, were the Swiss franc, the kiwi and the aussie. Today, the greenback is stabilizing, recovering around a third of its astounding losses against the yen.

Dollar/yen tumbled as much as 3.3% yesterday, in a move so rapid and large that looked like an intervention episode. Indeed, reports later in the day corroborated the suspicions, noting that the government had stepped into the FX market to buy yen and sell dollars.

Japanese authorities have cautioned several times in the recent past that they could act without any prior warning and they may have intentionally chosen the timing when the market was focused on the Fed aftermath and was preparing for the BoJ decision. In other words, officials likely intended to catch investors off guard to maximize the impact of their action.

Yen fails to capitalize on hawkish BoJ

That said, the yen is giving back a decent portion of its gains today, even as the Bank of Japan sounded more hawkish than its prior gathering. Officials decided to hold interest rates unchanged as was widely anticipated, but signaled further hikes in the coming months, with one member voting for a rate hike at this gathering.

Perhaps investors considered the intervention-related rally in the yen as a renewed selling opportunity as policymakers revised down their core inflation forecasts for the current fiscal year ending in March 2027. Although they upgraded their projections for the next fiscal year, it seems that investors do not believe that the BoJ could become more hawkish than it currently is.

After all, the projections for fiscal 2027 could change in upcoming meetings, and with the prospect of Prime Minister Takaichi replacing the members whose terms end with more dovish policymakers, the risks may be tilted towards downside revisions and delayed rate hikes.  The fact that market participants did not bring forward their rate hike bets, still pricing in a quarter-point increase in December, corroborates that view.

BoE appears willing to raise rates, pound gains

In the UK, the Bank of England kept interest rates unchanged yesterday, but the number of members dissenting the decision and voting for a rate hike grew from 2 to 3. The Bank once again highlighted its willingness to raise rates if deemed necessary to tame inflation, amid upside risks due to rising energy prices. Although inflation slowed to 2.6% y/y in June, officials anticipate a rebound later this year.

The pound benefited from the decision and accelerated its advance against the US dollar following the intervention in dollar/yen by Japanese authorities. As for investors' rate hike bets, the probability for a 25bps increase in September now rests at around 27%, while such a move is more than fully priced in by the end of the year.

Chip stocks drive Wall Street higher, gold retreats but stays above $4,000

On Wall Street, all three indices rebounded strongly, with the tech-heavy Nasdaq gaining nearly 3%, driven by a jump in chip stocks and a 15% rally in Microsoft, the stock’s biggest in 18 years amid reassuring results that eased worries about reckless AI spending. The less-hawkish-than-expected Fed and the tumble in the US dollar may have also encouraged equity traders to increase their risk exposure.

Index futures point to further gains today, led by Amazon, which announced strong results yesterday after the closing bell.

Gold moved further away from the $4,000 mark yesterday amid the dollar’s weakness, but it is pulling back again today. Although the precious metal remains above that psychological zone, it remains within a sideways range, between that area and the $4,200 territory. Thus, for the picture to turn convincingly bullish, a decisive move above $4,200 may be needed.

Oil prices retreated on Thursday and are extending their pullback today as the vessels passing through the Strait of Hormuz increased despite no progress or a breakthrough in negotiations between the US and Iran. However, the black liquid is set for a monthly increase of around 20%, which could well influence upcoming inflation prints.