The yen whipsawed on Friday, briefly rallying then giving back the gain, as traders stayed alert for a second round of intervention a day after Japanese authorities bought yen to defend the currency. The Bank of Japan held its policy rate steady but warned inflation could run hot, while speculators continued to hold bearish bets near their highest in two years.
The yen jumped as much as 0.6% to 158.535 per dollar in London trading on Friday before reversing course. It last traded down 0.3% at 159.905, having weakened to 160.90 after the Bank of Japan kept its short-term interest rate steady at 1% in a widely expected decision.
Traders brace for a second intervention
Traders remained on alert for further action a day after Japanese authorities' yen-buying, dollar-selling intervention set the currency up for its biggest weekly rise since February and a monthly jump of more than 1.7%. The move pulled the yen away from four-decade lows but failed to give it a sustained boost.
According to Bank of America FX/rates strategist Shusuke Yamada: "This may not be a time to underestimate policymakers' determination to defend the currency." He added that if authorities fail to convince markets of their commitment, intervention could reinforce perceptions that policymakers are running out of options.
Japan's top foreign exchange diplomat said Friday that support from the U.S. extends beyond psychological backing for the yen. Nikkei reported that U.S. authorities conducted rate checks, though the New York Federal Reserve declined to comment. In a rare coordinated move, South Korea also intervened by selling dollars on Thursday, a market source told Reuters; the won rose to a nine-month high before paring gains, last down 0.9% around 1,438 per dollar.
BOJ flags faster hikes, bearish bets persist
The BOJ, which hiked rates to a 31-year high last month, warned for the first time that underlying inflation could exceed its target, signalling a further rate hike from as soon as September. Governor Kazuo Ueda said many board members' inflation forecasts are fairly high and that they see risks skewed to the upside.
Japan's slow pace of rate increases has been blamed for pushing the yen to 40-year lows below 163 per dollar recently, and most analysts polled by Reuters expect the BOJ to raise rates again to 1.25% by year-end. Yet speculators have kept large bearish bets on the yen, with weekly data from a U.S. regulator showing net short positions worth $11.65 billion, near the highest in two years, as of July 24.
The BOJ's decision followed the Federal Reserve's move to leave U.S. rates unchanged, which bruised the dollar broadly. The greenback headed for its biggest weekly fall since early April and a monthly loss of nearly 1% against a basket of peers, before edging higher Friday after falling around 1.5% over the prior three sessions.
Source: Investing.com
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