Ankur Banerjee and Ray V
SINGAPORE (Reuters) – Japan appears to have bought time and breathing space for the yen to fall with the latest bout of suspicious developments, but it is also preparing for a protracted war with a market that views the currency as a compelling selling opportunity, analysts say.
Traders estimate the Bank of Japan (BOJ) spent nearly $59 billion defending the currency this week, helping the yen to its best weekly performance in more than a year.
The Japanese currency rose 5% from a 34-year low of 160.245 it hit on Monday. Tokyo has not yet confirmed its intervention.
But this week’s rally has been far from linear in a market clearly bearish on the currency given the huge gap between its ultra-low yields and those in other major economies.
The yen fluctuated wildly during the proposed interventions, gaining almost 5 yen in a matter of minutes and quickly losing some of that amount.
“Nothing has really changed,” said Rob Carnell, head of Asia-Pacific research at ING. “I think this has provided a momentary pause in what will inevitably be tested again by the markets, which will see this as free money when they take on the Bank of Japan…”
Carnell says the yen has become a “traders’ dream” because they can easily make money by simply buying dollars with the yen, waiting for the pair to rise, and then selling it when the Bank of Japan steps in to support the yen.
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“It would be crazy not to test this, knowing that at some stage they would intervene,” he said.
Before this week’s alleged market raids, Japanese authorities last intervened between September and October 2022, spending about $60 billion to defend the currency.
The yen was then around 152 to the dollar, but two months after the intervention it fell again. It lost another 20% of its value against the US dollar when it hit a 1990 low this week.
“Due to the large difference in rates, speculators will still be on the other side of this trade,” said Kaspar Hense, senior portfolio manager at BlueBay Asset Management.
The difference between the benchmark 10-year U.S. Treasury yield and Japanese government bonds is nearly 4 percentage points.
NO GOALS
Ben Bennett, Asia-Pacific investment strategist at Legal And General Investment Management, says Japan’s Ministry of Finance, which is responsible for managing the yen, is well aware of how monetary parameters stack up against the yen, and acts only to curb growth rates. depreciation.
“Intervention is expensive, and I think the Treasury will not want to spend money on a specific purpose,” he said.
Even after the Bank of Japan’s landmark move away from negative rates in March, the yen remains the cheapest major currency for borrowing and short selling, sealing its fate.
Analysts say this complicates forecasts for the yen, but it appears that 160 is the level the Bank of Japan wants to protect.
Hirofumi Suzuki, chief currency strategist at banking corporation Sumitomo Mitsui (NYSE:) in Tokyo, said Japanese authorities consider the decline since the March meeting “speculative and unacceptable” and may be aiming to return the yen to the level of 155 per dollar, where it was before 155 to the dollar. before this important political decision.
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Yujiro Goto, head of Japanese currency strategy at Nomura, said authorities simply want to help their importers get the dollars they need.
“I think the 150 is ideal for Japanese importers. I think the 152-152.50 level is probably what the Treasury wanted, but it didn’t reach that level, so there is a risk that the Treasury could come back for another round.”
Speculators also understand that the government’s military budget is not bottomless. Japan has about $1.3 trillion in foreign exchange reserves, but only about $155 billion it holds in dollar deposits is liquid.
Meanwhile, the Federal Reserve’s bets on rate cuts are retreating as the U.S. economy and labor markets remain hot. Speculative short positions in the yen reached their highest level in 17 years.
Fred Neumann, HSBC’s chief Asia economist, says Japan is only trying to end asymmetrical one-sided speculation rather than defending any level of the yen.
“Given the reality of higher interest rates in the US for a long time, this is an exercise in managing expectations. This is not an event that will necessarily lead to a rapid appreciation of the yen,” he said.
($1 = 152.8600 yen)