The Japanese yen is becoming the focus of the global foreign exchange market. On Monday, September 7th, the US dollar fell by 1.14% against the yen to 154.42, hitting its lowest level since February and dropping below the August low.
Last Tuesday, the US dollar rose above 160 yen, but this Monday it dropped to 154.42 yen.
According to a report by Reuters, Lee Hardman, a senior currency analyst at Mitsubishi UFJ Financial Group (MUFG), stated that in the past, after interventions by Japanese authorities, the yen tended to rebound, with the USD/JPY often bottoming out around 155. Breaking below that level this time can be seen as a signal of further yen strength.
The current appreciation of the yen is mainly being driven by expectations of the Bank of Japan’s (BOJ) accelerated interest rate hikes. The market currently expects a 75% probability of a 0.25% rate hike at the BOJ meeting on September 18th and a 60% probability of another rate hike before the end of the year.
Meanwhile, Japanese investors may be repatriating some of their overseas funds back to Japan.
The yen rose over 2% last week due to multiple factors, including unwinding of carry trades and expectations of fund inflows into Japan. Some investors in the past would borrow the lower-interest yen and invest in higher-yield assets to profit from the interest rate differential, known as “carry trades.” If the yen continues to appreciate, investors engaging in these trades by borrowing yen may face greater exchange rate risks.
In August this year, Washington and Tokyo jointly intervened in the foreign exchange market to support the yen, which had dropped to a 40-year low. However, the yen’s appreciation resulting from the intervention quickly dissipated. Now, there are new driving forces in the market, including fund flows into Japan and unwinding of carry trades.
Eric Robertsen, Global Head of Research and Chief Strategist at Standard Chartered Bank, mentioned that despite the general rise in global borrowing costs, carry trades have remained one of the stronger investment strategies this year. However, with the recent sudden strengthening of the yen, it may begin to pose a threat to the returns from such trades.