In an unexpected twist, the yen rose sharply against the US dollar, leading to debates about whether Japanese officials intervened in the currency market. The yen jumped by about four yen to 157.44 per dollar after US economic data was released. This sudden increase in trading volumes was similar to past actions by Japanese authorities.
Japan’s top currency official, Masato Kanda, did not confirm any intervention and mentioned that any actions would be reported at month's end. Takafumi Onodera from Mitsubishi UFJ Trust & Banking Corp. noted the timing matched with weak CPI figures, hinting at possible intervention.
TV Asahi reported officials had entered the currency market, though Wall Street traders had mixed opinions. Recently, the yen has been the worst performer among the Group of 10 currencies, hitting its lowest level since 1986, prompting officials to find ways to support it.
Historical context and recent measures
Thursday’s yen spike mirrored earlier interventions this year. In April and May, the Ministry of Finance injected ¥9.8 trillion to reduce the yen's losses. Anonymous traders noted trading volumes after the inflation data were similar to these past interventions.
Jane Foley, head of currency strategy at Rabobank, said the big movement likely pointed to intervention. She noted it added excitement to trading activities. Leah Traub from Lord Abbett & Co. noted that ongoing yen strength might need changes in both US and Japanese policies.
Despite a recent rate hike by the Bank of Japan, the attitude towards the yen remains mostly negative. Speculative traders heavily bet against the yen, holding contracts worth about $14.7 billion—the highest since 2007, according to CFTC data.
What we're seeing is a reaction in markets where positioning was already long rates and positioned for curve steepening in the US, while foreign-exchange markets were still short the Japanese yen
Ed Al-Hussainy
Ed Al-Hussainy, global rates strategist at Columbia Threadneedle Investment, suggested unexpected economic data could sway yen movements due to current market positioning.
Influence of US inflation data
The yen's rise was also driven by positive US inflation data. US inflation eased for the third month in June, with consumer prices dropping by 0.1% from May to June, the first monthly decline since May 2020. Year-over-year, prices rose by 3% in June, down from 3.3% in May.
The recent inflation figures reinforced the Federal Reserve's confidence in hitting their 2% target, potentially leading to interest rate cuts. Luke Tilley, chief economist at Wilmington Trust, highlighted the role of falling rent and homeownership costs in this trend. Mary Daly from the Fed’s San Francisco branch added that cooling inflation and job market conditions justify rate reductions.
Economic outlook and consumer impact
Despite positive inflation data, prices for essentials like food, rent, and healthcare remain high compared to pre-pandemic levels, challenging consumers and potentially influencing President Joe Biden’s re-election. Gas prices dropped for the second month, decreasing by 3.8% on average, while grocery prices slightly increased by 0.1%.
Core prices, excluding food and energy, rose just from May to June, down from the previous month’s 0.2% increase, signaling a positive trend for the Fed's inflation outlook. Prices for new and used cars also fell, with used car prices decreasing by 10.1% over the past year.
Rental and homeownership costs, heavily influencing the consumer price index, grew at a slower pace last month, rising by 0.3% from May to June, the mildest increase in nearly three years. A surge in apartment construction boosted rental unit supply, pushing some landlords to keep rents stable.
Alan Detmeister, an economist at UBS Investment Bank, expressed optimism, noting that the long-awaited price weakness is now becoming visible.
However, many consumers still face financial difficulties. Deborah Stettler, a single mother from Quincy, Massachusetts, dealt with a steep rent increase and high food prices despite getting a new job in children's services. This reflects a broader trend of consumers cutting grocery spending and looking for cheaper alternatives.
With inflation much lower than its mid-2022 peak of 9.1%, the Fed has kept its key interest rate steady for almost a year. Economic indicators suggest a strong, though slowing, economy. Wall Street traders predict two rate cuts this year, likely starting in September.
Fed Chair Jerome Powell recently noted that the job market has cooled significantly and is not causing broad inflationary pressures, hinting at a change in the Fed’s strategy for managing inflation and economic growth.