Yen Wipes Out Friday’s Gain as Market Focus Returns to Yield Gap
(Bloomberg) — The yen has erased its sharp rebound on Friday, as concern over Japan’s low interest rates outweighs any bullishness stoked by suspected official intervention and weaker-than-expected US data.
The currency slid 0.5% in Asian trading on Monday, wiping out its advance in the last session. On Friday, the yen spiked to touch a level unseen in three weeks, as surprisingly soft US jobs data triggered a selloff in the dollar and prompted traders to bring forward rate-cut bets for the Federal Reserve.
The wild volatility in the yen in the past week underscores the challenge Japanese officials are facing as they try balance the need to raise rates only gradually but also avoid uncontrollable depreciation. Before two rounds of suspected intervention since late April, the currency slid beyond 160 per dollar for the first time since 1990 due to its bloated rate discount to the US.
Dollar-yen is likely to move higher and re-test the 160 level given the “tremendously wide” US-Japan rate differentials, Alvin Tan, head of Asia FX strategy at RBC Capital Markets in Singapore said on Bloomberg TV Monday. “The impact of the interventions will dissipate quite quickly if indeed US interest rates do not continue to drop from here.”
Japanese Yen Moves Are Linked to US Yield Differential | Correlation dropped amid suspected intervention to support the yen
To stem yen losses, the Ministry of Finance has probably bought the currency twice in late April and early May, spending about ¥9 trillion ($58.9 billion) in total, according to Bloomberg calculations. The yen still remains the worst performing major currency so far this year with a loss of more than 8% against the dollar.
Japan’s top currency official Masato Kanda has declined to comment on whether the authorities had intervened.
Former US Treasury Secretary Lawrence Summers is in the camp that argues intervention won’t have a long-lasting impact. He said such operations are ineffective at shifting exchange rates, even at the large magnitude that Japan has been thought to have deployed recently.
US Treasury Secretary Janet Yellen over the weekend declined to comment on whether Japanese authorities intervened to support the currency. However, she said the US would expect interventions to be rare and consultations to take place.
“When looking at previous periods of Japan’s intervention, it is more successful when the US participates,” Paul Mackel, global head of FX research at HSBC Holdings Ltd., wrote in a note to clients. However, Yellen’s comments don’t sound like a ringing endorsement, he said.
–With assistance from Ruth Carson.
(Updates yen move in second paragraph.)
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