The yen on Tuesday plunged to its lowest level against the US dollar since August 1998 as hedge funds in Europe and the US resumed bets that the Bank of Japan’s ultra loose monetary policy would continue.
Japan’s currency dropped as much as 1.7 per cent to a low of ¥142.97 against the dollar in a ferocious sell-off that began late in the Tokyo day and accelerated in the New York trading session.
The BoJ has defied the tightening trend among global central banks, maintaining a programme that keeps long-term borrowing costs pinned at ultra low levels even as yields surge in other markets. The widening gulf has severely dented the allure of holding the yen relative to other currencies.
Yen selling gathered steam on Tuesday after a key survey showed that activity in the US services sector unexpectedly picked up in August. The data prompted a further jump in US and European bond yields as traders bet the Federal Reserve would continue this month with its programme of big rate rises to tame inflation.
A clutch of Wall Street banks have also said they expect the European Central Bank to raise interest rates this week by the most since 1999, something that could place yet more pressure on Japan’s currency.
The BoJ unlike its counterparts is still aiming to keep a lid on long-term borrowing costs, through a mechanism known as “yield curve control”, in which it has pledged to buy an unlimited quantity of bonds to keep the 10-year government bond yield from rising above 0.25 per cent. In comparison, the US 10-year yield traded at 3.35 per cent on Tuesday. Funds often shift into countries whose debt offers higher returns.
Traders said that over the course of August, leveraged funds, which had previously wagered heavily on the yen’s decline and had helped drive its long descent since March, began to reduce those positions on concerns that the rising risk of recession would cause central banks to turn more dovish.
However, the Fed signalled at the Jackson Hole meeting last month that the US rate cycle was not finished and this appears to have revived the flow of speculative money into the “short yen” bet.
JPMorgan analyst Benjamin Shatil said there was now a vacuum in terms of trading barriers for the yen. “We do not rule out an eventual extension in yen toward the 1998 high of around 147, particularly now that the market is comfortable with the idea that 140 is not a line in the sand,” he said.
Earlier on Tuesday, Japan’s finance minister Shunichi Suzuki said the yen’s sharp moves were undesirable and that he was watching the plunge with a “great sense of urgency”. The remarks closely echoed comments he made last week, which have yet to convince the market that Japanese authorities are poised for anything more than verbal intervention.
In a note to clients entitled “Staring into the abyss”, Joey Chew, senior Asia FX strategist at HSBC, noted the yen’s increasingly unusual relationship with risk indicators. The Japanese currency, said Chew, was now negatively correlated with the Vix index, a key measure of expected volatility in US equities, meaning it weakens as equity market volatility rises.
But the phenomenon could prove temporary. “After higher terminal rates by major central banks are more fully priced in by the market, the yen’s negative correlation with risk sentiment is likely to normalise,” wrote Chew.
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September 06, 2022 at 11:51PM
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Japanese yen hits 24-year low against dollar - Financial Times
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