USD JPY - FUNDAMENTAL ANALYSISThe Japanese Yen (JPY) recently bounced back from its lowest point in seven months against the US Dollar (USD), following a statement from Japan's leading currency official that they are open to considering all possibilities regarding the currency.
The recent depreciation of the Yen has been attributed to a policy gap between the accommodative Bank of Japan (BoJ) and foreign central banks, which are following a more aggressive monetary policy approach.
Despite the potential for the US Dollar to Yen (USD/JPY) exchange rate to climb higher, the recent intervention by Japanese authorities at the 145 mark indicates that short-selling the Yen may pose significant risks.
Chris Turner, ING Bank: USD/JPY's Volatile Dance
Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE at ING Bank offers a perspective focused on the potential for a strong dollar to continue pushing the USD/JPY higher.
"The strong dollar environment keeps USD/JPY grinding higher and approaching the 145 area, where Japanese authorities sold FX last September," says Turner.
This suggests an anticipation of Japanese intervention should the USD to JPY exchange rate continue its upward trend.
However, Turner also predicts potential volatility.
"Over the coming month, we can see USD/JPY sharply bouncing around in a 140-145 range – suggesting that short-dated USD/JPY option volatility is priced a little too low," he adds.
This indicates that while the dollar's strength could push the pair higher, market participants should also brace for possible fluctuations within a defined range.
Yoshio Takahashi, Natwest: BoJ's Cautious Stance
Yoshio Takahashi, Chief Japan Economist at Natwest, highlights the role of the Bank of Japan's (BoJ) policy decisions in shaping the Yen's trajectory.
According to Takahashi, the board continues to voice caution about adjusting policy settings too hastily, implying a lack of confidence in the sustainability of stronger wage growth.
"Multiple mentions of the possibility of 2H FY2023 inflation exceeding current expectations suggest to us that the BoJ is quite likely to upwardly revise its official projections at the July meeting," says Takahashi.
This hints at the BoJ's dovish stance and the potential impact it could have on the yen.
The strategist also highlights the impact of politics on the currency.
"BOJ watchers will also need to be keeping at least one eye on exchange rate movements and domestic politics.
Vice Minister of Finance for International Affairs Masato Kanda ramped up his yen-supportive jawboning on June 26," Takahashi adds, signalling that political interventions and verbal tactics could significantly influence the yen's position.
Roberto Mialich, UniCredit: Monetary Policy Uncertainty
UniCredit's FX Strategist, Roberto Mialich, underscores the influence of monetary policy uncertainty on the yen's weakness.
According to Mialich, doubts about the BoJ's policy normalization this year are contributing to the yen's broad weakness.
"The JPY fall is mostly due to doubts about the BoJ’s policy normalization this year. The Japanese forward curve has already moved to reflect this uncertainty," says Mialich.
Looking ahead, Mialich forecasts potential for change.
"We see the 19 December BoJ meeting as the one in which a first step in normalization might be announced. This might drag USD-JPY to 135," he adds.
Despite the yen's current softness, Mialich sees potential for its recovery should the BoJ take steps towards policy normalization.
Paul Mackel, HSBC: The Weight of Intervention and Yield Caps
Turning our lens to the analysis from Paul Mackel, Global Head of FX Research at HSBC, there's an assertion of a cap on USD/JPY's growth, primarily influenced by the threat of foreign exchange intervention and the upper limit of US Treasury yields.
"USD-JPY is likely to be capped by the threat of FX intervention and US Treasury yields already towards the top end of the recent trading range," says Mackel.
This denotes an environment where growth in the pair could be restrained by multiple macroeconomic factors.
In light of a potential policy change by the BoJ in September, Mackel maintains a cautious stance.
"It is too early to play that in the JPY but the worst-performing currency in G10 FX so far this year may at least enjoy some stability in the coming weeks," he adds.
His comments suggest a degree of near-term stability in the yen despite it being the underperformer among G10 currencies this year.
Barclays Analysts: Rising Intervention Risks
Analysts at Barclays share similar concerns regarding intervention by Japanese authorities.
Their analysis also touches on the recent depreciation of the yen due to diverging monetary policy between a dovish BoJ and hawkish central banks overseas.
"Recent JPY depreciation has been driven by policy divergence between a dovish BoJ and hawkish central banks overseas," Barclays analysts suggest.
This perspective underscores the global forces at play influencing the yen's standing in the foreign exchange market.
The forecasted rise in Tokyo's Consumer Price Index (CPI) and the recent verbal intervention also feature prominently in Barclays' outlook.
"Although USDJPY could head higher still, recent intervention by the Japanese authorities around 145 makes yen shorts an increasingly dangerous proposition here," they add.
This implies the possibility of a continued rise in USD/JPY, though not without associated risks owing to likely intervention.
Valentin Marinov, Credit Agricole: Gauging the Intervention Risk
Valentin Marinov, Head of G10 FX Strategy at Credit Agricole, presents an intriguing perspective on the interplay between the yen's value and the possibility of intervention.
"Japan’s FX Tsar, Masato Kanda, has ramped up his verbal intervention in USD/JPY following the exchange rate’s move to nearly 144 late on Friday," says Marinov.
His comment highlights the growing concern within Japan about the pace and magnitude of the yen's depreciation against the dollar.
Marinov's forecast hinges on the valuation of USD/JPY exchange rate and the potential verbal and actual intervention by Japanese authorities.
"A move towards 146 would see USD/JPY become significantly overvalued, however.
USD/JPY traders should next watch for Kanda using the phrases that FX is 'clearly not reflecting fundamentals' or that movements in FX are 'clearly being excessive' or 'one side'," he adds.
This insight reflects the delicate balance in the FX market and the potential triggers that might spur a more forceful response from Japanese authorities.
