The Japanese yen has largely been on a roller coast of appreciation over the past few weeks as the air disappears out of the US dollar. Subsequently, as the USD/JPY pair has continued to fall, the consternation of the Japanese government has been palpable. The response from the embattled government has been largely as expected with Minister Aso asserting that a persistently “one sided yen” would bring intervention from the Bank of Japan. However, it remains to be seen if the verbal intervention within foreign exchange markets will be enough to keep the wolf from the door.
Following the comments the yen immediately fell 0.85% pushing the USD/JPY to around the 109.33 mark. However, despite the resolute comments from the Japanese Finance Minister, there are plenty of reasons to expect that the speculative assault will continue for the yen. Subsequently, Japanese exporters are likely to continue to suffer throughout the remainder of the quarter unless a swift intervention rebalances the yen to a more palatable level.
The reality is that continued yen weakness is difficult to see on anything but a short term basis when you consider the range of increasing growth worries that is likely to impact the US Federal Reserve’s rate hike schedule. It’s already evident some members on the FOMC are stepping away and softening their rate hike rhetoric. Subsequently, given the amount of rate hike pressure that has been priced in to the US dollar, it is therefore unsurprising that we are seeing some USD weakness and capital flows.
There is therefore a range of medium term pressures building upon the Bank of Japan to step in and intervene within the FX markets to weaken the yen. As long as the yen remains relatively strong against the Dollar Abenomics is likely to find it hard going in generating the inflation and export growth that it seeks. Subsequently, there are those that expect the central bank to step in decisively to depreciate the Yen. However, there are also some external pressures upon the bank as the US remains relatively sensitive to what they see as currency manipulation.
Ultimately, the yen’s strength is likely to continue as long as downside risks to global growth are present to impact the US Fed’s tightening schedule. Intervention by the central bank remains a real risk if the pair declines too far towards the key 105.00 level. However, whilst valuations remain within the current range of 107.00 – 109.00, any action by the BoJ remains unlikely.
At this juncture, the trend driving risk event is more likely to be the US Fed, rather than the Japanese central bank. Subsequently, keep a close watch for hikes to the Federal Funds Rate in the near term because any move by the Fed ultimately means a rally for the dollar yen.
