The Strategist

Navigating Uncertainty: insights into JPY fluctuations and intervention

The dollar-yen pair was in focus at the start of the week as it experienced notable fluctuations similar to those seen in emerging market currencies. In a market with reduced activity due to the holiday season, the yen initially weakened significantly, surpassing the 160 per dollar mark and reaching its lowest level in 34 years. However, it quickly recovered all its losses for that day and staged a strong rebound. Nevertheless, volatility is expected to persist until the US Federal Reserve (Fed) starts to cut rates and/or the Bank of Japan (BoJ) implements significant policy changes.

Sebastian Petric, LGT Senior FX Strategist
Reading time
10 minutes
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The recent likely intervention in the currency market by the Bank of Japan has sparked discussions about its potential impact on the dollar-yen exchange rate. However, we argue that such interventions, if unilateral, may not be sufficient to alter the prevailing trajectory of the yen. This intervention comes at a time of evolving policy within the Fed, which hold considerable sway over the dollar-yen exchange rate.

Outlook closely linked to the Fed

We would like to highlight the need for a broader context when evaluating the effectiveness of currency interventions. While the BoJ’s reported intervention is in line with recent currency movements, it is unlikely to bring about significant changes. Sustained shifts in the yen's direction would require coordinated efforts among major economies or a clear dovish stance from the Fed. As such, the outlook for the dollar-yen exchange rate remains intricately tied to the Federal Reserve’s evolving policy and, by extension, the performance of the US economy.

Comparisons with past interventions reveal nuances in the current situation. Previous interventions by the BoJ coincided with specific market conditions. However, the current landscape poses different challenges, with the Federal Reserve's policy expectations trending towards a potentially hawkish stance. 

This complicates the effectiveness of unilateral interventions in addressing carry costs and bolstering the yen.

Concerns about carry costs

At present, the main driver of the dollar-yen exchange rate continues to be the Fed's policy stance. The shift from a dovish to a potentially hawkish stance has heightened concerns about carry costs. Market expectations have adjusted accordingly, with fewer anticipating rate cuts and more leaning towards a neutral or rate-hike stance by the Fed.

As a result, the dollar-yen pair is likely to remain volatile until significant policy adjustments are made. A weaker USD against the JPY would, at best, require action from both the US Federal Reserve and the Bank of Japan. Once the yield spread narrows, there is a possibility that the JPY could alter its course.

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