Yen hits the FX intervention ‘danger zone’
2023.06.30 06:20
- Dollar gains ground on solid GDP data, awaits more releases today
- Yen receives more intervention threats – are markets sleeping on a BoJ shift?
- Eurozone inflation data coming up, gold drifts, stocks keep winning
Dollar rides Fed bets
Global markets are set to close the second quarter on a cheerful note, with risk assets flying high and safe haven instruments losing their shine, as a stream of encouraging data releases increasingly convinced investors to unwind bearish bets.
Recession concerns have been put on ice, especially in the US, after the final reading of GDP for the first quarter was revised higher yesterday. The US economy expanded at an annualized pace of 2%, eclipsing the previous estimate of 1.3%, reflecting stronger contributions from net trade and consumption.
Coupled with a decline in weekly jobless claims that helped dispel fears the labor market is loosening, traders received the green light to boost their wagers on the Fed raising rates next month. The implied probability of a rate hike in July now stands around 85%, with the core PCE price index today and the jobs report next week set to add the finishing touches.
As for the dollar, it is about to close the week and the quarter with some minor gains. Signs that the US economy is more resilient than other regions and the resulting rally in US yields were mostly offset by the hawkish rhetoric from central banks in Europe and weaker safe-haven demand for the dollar, leaving the reserve currency only a shade stronger this quarter.
Yen hits the danger zone
Japanese authorities escalated their warnings about FX intervention earlier today, with finance minister Suzuki characterizing the latest moves as “rapid and one-sided” as the yen fell to touch the 145 mark against the US dollar, the region that first triggered intervention last year.
Judging by the sharp spike in implied volatility for dollar/yen options this week, investment managers have started to hedge against sharp moves in the yen over the summer, either through FX intervention or via a Bank of Japan policy shift. Yet this reassessment is only visible in derivatives markets, as neither Japanese bonds nor the yen have moved much.
On the data front, the latest Tokyo CPIs came in slightly below forecasts, although both headline and core inflation remained above 3%. Bank of Japan Governor Ueda kept his cards close to his chest this week, but he did softly open the door for loosening the yield curve control strategy that has crippled the yen, if policymakers become “reasonably confident” inflation will remain above 2% over their forecast horizon.
Admittedly, this is as far as Ueda can go in signaling a potential policy shift ahead. If he provided any clearer signals, the BoJ’s yield ceiling would immediately come under attack by market forces, which they want to avoid. Hence, don’t expect the BoJ to tell investors in advance it will adjust its yield ceiling – it almost has to be a ‘surprise’. Now as to whether this will happen in July, the next piece of the puzzle will be the BoJ’s Tankan business survey on Monday.
Stocks roar, gold drifts, Eurozone inflation ahead
Stock markets have steamrolled their way to victory this quarter, with the S&P 500 rising 7% and the Nasdaq gaining more than 11%. It’s been a case of ‘all news is good news’ as equities have advanced despite a powerful rally in global yields.
On the contrary, it’s been a painful quarter for gold prices. With equity markets going into overdrive and recession nerves calming, demand for safe haven assets suffered a major blow, and the sharp rally in real yields didn’t do gold any favors either.
Finally, there’s a barrage of key data releases on tap today, with Eurozone CPIs and the US core PCE stealing the spotlight. 
