As more and more people expect the interest rate gap between Japan and the United States to narrow, there are increasingly signs of a turning point in the yen.
On Thursday, the Japanese yen against the US dollar exchange rate rose more than 1%, continuing the strong rebound from the lowest level since the 1980s in the past two weeks. Japan's obvious intervention measures to support the yen, significant reduction in yen short selling bets by hedge funds, and closure of arbitrage trading that has been suppressing the yen, have all pushed up the yen's value.
Whether the strong yen will be a turning point depends on the decisions of the Bank of Japan and the Federal Reserve next week. About 90% of Bank of Japan observers believe that the Bank will raise interest rates on July 31, even if it is not their base scenario; while the Federal Reserve is facing increasing calls to begin cutting interest rates on the same day.
Kit Juckes, chief forex strategist at Societe Generale, said that in the face of some better entry points for intervention, this is certainly reducing positions before the Bank of Japan may raise interest rates.
As of 15:34 Tokyo Time, the yen against the US dollar exchange rate rose 0.7% to 152.75, giving up some of its earlier gains, rising for the fourth consecutive day, and outperforming all G-10 currencies. The Japanese stock market was also affected, as the rise of the yen intensified the slump caused by the sharp fall in US stocks.
DBS bank macro strategist Wei Liang Chang stated that due to the increase in risk aversion caused by the sell-off of technology stocks and the presence of speculative short positions, the closure of arbitrage trades boosted the yen. The yen may continue to strengthen before the Bank of Japan meeting next week.
Thursday's swap pricing shows that the likelihood of the Bank of Japan raising interest rates by 15 basis points before July 31 is 58%, far higher than around 0.29% last week. If Japan does raise interest rates, the interest rate differential with the United States will still be around five percentage points.
Yusuke Miyairi, a forex strategist at Nomura Securities in London, said that two weeks ago, everyone was talking about yen arbitrage trading, but now it seems that people have completely forgotten about it and are liquidating positions.
The recent sharp rise of the yen at the start of London trading shows that global investors are taking action to close out arbitrage trading.
According to the latest data from the US Commodity Futures Trading Commission, leveraged funds significantly reduced their net yen short position, the largest since March 2011. Asset management companies also reduced their yen short bets, the largest in a year.
Andreas Koenig, global head of foreign exchange at Amundi SA in London, said the yen will become more attractive, so we have reduced our short positions. He also said in an interview last week that he recently saw intervention in the yen, which is raising uncertainty about holding yen short positions. We also believe that the United States may begin a relatively rapid easing cycle, which could weaken the dollar.
Homin Lee, Senior Macro Strategist at Lombard Odier Singapore Ltd, said that the appreciation of the yen will lead to a certain degree of caution in the stock market in the short term, as yen weakness has been a key driving force behind the strong performance of Japanese stocks.
Tomo Kinoshita, global market strategist at Invesco Japan, said the decline of the Nikkei index on Thursday was due to the fall of US stocks. But he added that the likelihood of a rate hike by the Bank of Japan at its July meeting has increased, causing the yen to appreciate significantly, which has led to a decline in export-oriented stocks and highly dependent borrowing stocks.