USD/JPY advances further above 161.00, eyes on possible FX intervention
|- USD/JPY continued to trade near recent highs around 161.45 in Tuesday’s early Asian session.
- The US ISM Manufacturing PMI was weaker than expected, declining to 48.5 in June from 48.7 in May.
- The potential FX intervention from Japanese authorities might cap the pair’s upside.
The USD/JPY pair extends upside near 161.45 on Tuesday during the early Asian trading hours. The modest recovery of the Greenback provides some support to the pair. However, there are expectations that Japanese authorities could soon intervene in the foreign exchange market to prevent the Japanese Yen (JPY) from depreciating.
US manufacturing contracted for a third consecutive month in June amid subdued demand and higher interest rates. The US ISM Manufacturing Purchasing Managers Index (PMI) dropped to 48.5 in June from 48.7 in May. This figure came in below the market consensus of 49.1. Nonetheless, the hawkish comments from Fed officials continue to underpin the Greenback despite the weaker-than-expected US economic data.
On Friday, San Francisco Fed President Mary Daly said that monetary policy is working, but it’s too early to tell when it will be appropriate to cut the interest rate. Daly further stated that if inflation remains sticky or comes down slowly, interest rates would need to be higher for longer.
On the other hand, Japanese Finance Minister Shunichi Suzuki said that authorities are concerned about the impact of "rapid and one-sided" FX moves on the economy, adding that excessive volatility in the currency market is undesirable and that authorities will respond appropriately to such moves. This, in turn, might support the JPY in the near term and cap the upside for the pair. OCBC analysts said “USD/JPY continued to trade near recent highs. This is also near the highest level since 1986. There are expectations that Japanese authorities could soon intervene. While the level of JPY is one factor to consider, officials also focus on the pace of depreciation as the intent of intervention is to curb excessive volatility.”
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.
The BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
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