Commerzbank’s Michael Pfister highlights renewed weakness in the Japanese Yen as USD/JPY repeatedly breaks above 160 despite record FX interventions. He argues that expectations for Bank of Japan rate hikes, rather than intervention, now drive the currency, with recent hawkish comments boosting speculation. Pfister warns that failure to deliver a hike at the upcoming BoJ meeting could see the Yen weaken again.

Yen recovery hinges on BoJ action

“Following the last Fed meeting (and shortly before the BoJ meeting), coordinated fx market interventions have once again reached a new record level. But they have merely delayed the upward trend in USD-JPY. In other words, the interventions initially pushed the exchange rate significantly lower, but the upward trend subsequently resumed.”

“Since yesterday morning, however, the yen has started to move. Due to several sharp downward swings in USD-JPY it is now trading below 158 again rather than above 160. This made the yen one of the big winners on the FX market yesterday.”

“These expectations have recently gained significant momentum, and were further fuelled this week by comments from the US Treasury Secretary urging officials to raise interest rates. Yesterday, these were reinforced by comments from a BoJ hawk, who refused to commit to a 25-basis-point increase for the upcoming rate hike and did not rule out back-to-back rate hikes.”

“Comments made in recent weeks nevertheless suggest that the BoJ may be inclined to increase the pace of its interest rate hikes significantly (currently roughly every six months). As we have repeatedly stated, a sustained recovery in the yen depends primarily on the actions of the Bank of Japan (and fiscal risks).”

“For example, if the BoJ does not raise interest rates in two weeks’ time, the yen is likely to weaken again. Should there be further fx interventions following the meeting and the subsequent light trading due to public holidays, these would again be no game changer. In other words, the fate of the yen now hinges directly on the upcoming meeting in two weeks’ time.”