The Japanese yen reached a new 34-year high against the US dollar on Monday, prompting speculation that Japanese authorities had intervened in the foreign exchange market for the first time in 18 months. The greenback plummeted from an intraday peak of 160.245 to a low of 154.4 yen in quick succession, triggering concern among traders about potential intervention by the Bank of Japan. The dollar subsequently recovered slightly and last traded at 156.01 yen, down 1.47%.
Trading volumes were lighter than usual due to Japan's Golden Week holiday, which may have amplified the impact of any intervention. Joseph Trevisani, senior analyst at FX Street, commented that the timing and market conditions were favorable for intervention, as a thinner market could amplify the effect.
In just six minutes following midday, the dollar's value considerably decreased, from 156.495 to 155.05.
Masato Kanda, Japan's top currency diplomat, declined to comment on whether intervention had occurred, but traders reportedly confirmed it, with the Wall Street Journal also reporting Japanese authorities' involvement. The significant drop in the value of the yen versus the dollar (over 10%) during the current year has led many to believe that Japan would intervene to save its currency from further depreciation.
When any central bank starts to intervene, it does put traders on watch. It makes traders rethink the sizing of their position
Nate Thooft
Nate Thooft, chief investment officer and senior portfolio manager at Manulife Investment Management, warned that central bank actions might prompt changes in traders' positions.
Market speculations and central bank actions
Non-commercial traders held an impressive 179,919 yen short contracts as of the April 23 week, marking a new high since records went back to 2007. This is according to the Commodity Futures Trading Commission's report.
The value of the yen decreased noticeably on Friday following the Bank of Japan's decision to maintain its current monetary policies without hinting at any reduction in its JGB purchases. The BoJ is thought to have possibly made this move just before the US Federal Reserve's announcement on May 1.
The consensus is that the Fed will maintain the current interest rates, as indicated by the CME FedWatch Tool. This expectation stems from the robust employment figures and inflation rates that have exceeded predictions.
Investor expectations for the rate cuts have been scaled back continually, with diverging policy stances between major central banks exacerbating dollar weakness against the yen.
"Over time, with this interest differential between the BoJ and the Fed and the obvious reluctance of the BoJ to do anything about that, to change their decades-old policy, now essentially zero interest rates, it's tough to build up any momentum for the Japanese yen going the other way to strengthen," Trevisani explained.
Moreover, speculations are high that the European Central Bank (ECB) and the Bank of England (BoE) will initiate a series of interest rate cuts soon.
The value of the US Dollar Index decreased by 0.31%, reaching 105.63, as the euro added 0.25% in strength versus the greenback.
The release of European inflation data, an essential factor in shaping ECB interest rate decisions, is scheduled for this week. With great importance attached to the upcoming European inflation figures, investors and analysts eagerly anticipate their impact on the ECB's monetary policy stance.
The dissemination of these inflation statistics is expected to offer significant clues regarding potential shifts in the European Central Bank's approach towards interest rates moving forward.
The Spanish inflation rate for the year ending in April reached 3.4% from 3.3%. Inflation figures released from Germany indicated a slight uptick during April, with price growth predominantly attributed to rising food costs and a smaller decline in energy prices.
Amidst the ongoing turmoil in the global economy and heightened geopolitical tensions, currency market participants must stay updated on the latest developments and adjust their trading strategies.