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BoJ intervenes to save yen as Fed paves way for cuts in July

BoJ intervenes to save yen as Fed paves way for cuts in July

Fri, 05/10/2024 - 06:46

The post-pandemic era has been filled with ups and downs for the currency markets in general. We've seen the euro and US dollar reach parity for the first time in over 20 years. Then, there was the runaway inflation eating away at fiat currencies the world over. Finally, albeit slightly less well-publicised in the West, we had the undeniable and seemingly endless decline of the Japanese yen. Ever since 2021, the yen has been falling hard against all the majors and, by March 2024, had already lost almost a third of its value against the greenback.

From the start of April, however, the Bank of Japan has been making significant efforts to stop the rot and prevent USD/JPY from surpassing 160, a level unseen since 1990. The BoJ's first move was to announce a historic rate hike, its first since 2007. With a less-than-rapturous response from the market, Finance Minister Shunichi Suzuki pledged that he wouldn't rule out "any measures'' to support the yen, which seemed to breathe some life into the Asian currency. Now, starting 1 May, we've seen a rollercoaster week for JPY as this promised intervention appeared to take shape. But the BoJ isn't the only central bank on the move. So, what will be the forces driving the global forex market this year, and what can we expect for the yen, US dollar, and euro in the rest of 2024?

Banking on it

As we've already touched upon above, the biggest driver in the Japanese yen's recent resurgence has undoubtedly been government and central bank intervention to prevent a continued descent towards almost unchartered territory for the Japanese national currency. Although it is unconfirmed, the JPY's move to the upside this past week has been largely attributed to active purchasing by the BoJ, with data indicating that it may have spent $5.5 trillion yen ($35 billion) boosting the currency on 30 April. While we did see a move back towards the near-term target of 140, the pair then reached as high as 157 in inter-day trading before settling around its current level of 154.53.

It began to look suspiciously as if Tokyo's intervention would prove insufficient to overcome the bearish pressure on the yen. If the pair had managed to cement a hold above 158, which would mark a 61.8% Fibonacci retracement of Monday's decline, it's likely that the bears would have been emboldened enough to push on towards 160. The market appears to have calmed during this week following BoJ Governor Ueda's comments that he is ready to raise interest rates further if inflation proves higher than expected this month. However, thus far, each intervention appears to be providing nothing but a temporary stopgap on the way to 160.

An unlikely ally

Despite the appearance that the Japanese authorities are doing little more than treading water, their hard work could now get a much-needed boost from the world's most powerful central bank: the US Federal Reserve. Speaking last Wednesday (1 May), Fed chair Jerome Powell finally broached the issue of potential "paths" for interest rates this year. And while he appeared to rule out any move at this month's meeting, the possibility of a long-anticipated rate cut in July was put on the table. If this does indeed come to pass, the expected effect will naturally be a weakening of the greenback and a buoying of risk assets, a welcome result for both the BoJ and US stock market investors. After all, the yen's woes are not just down to its own weakness but rather the dollar's historic strength. Indeed, the unusually strong dollar is precisely why the BoJ have been swimming against the tide with their recent interventions.

That said, the June "dot plot" will likely show the majority of Fed officials favour two or fewer rate decreases in 2024, and it's difficult to say how many had already been priced into the dollar given the ambitious expectations of multiple cuts earlier in the year. In this context, we'd be wise not to expect softer Fed policy to be a miracle cure for what ails the yen, but coupled with some much-needed hikes by the BoJ, we might just see USD/JPY trading in a much healthier 140-150 range by the end of the year.

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