(Bloomberg) -- A rapid move higher for Japan’s yen showed little sign of slowing on Wednesday, barreling through key levels against the US dollar and other peers.
The currency rose more than 1% against the greenback after breaking through the key psychological threshold of 155 per dollar and blowing past the pair’s 100-day moving average for the first time since mid-March. Analysts attribute the shift to an unwind in global carry trades, which use low-yielding currencies like the yen to fund investments in higher yielders such as Mexico’s peso or the Australian and New Zealand dollars.
It was the third straight-day of gains for the Japanese currency, which has advanced almost 5% since slumping to a near four-decade low on July 3. Bouts of suspected intervention earlier this month helped initiate the rebound, along with comments on the excessive weakness of the currency by former President Donald Trump and senior members of Japan’s ruling party.
And traders are also gaming out a possible interest-rate hike by the Bank of Japan next week that would hurt the yen’s appeal as a funding currency for carry trades.
The move is “potentially squeezing the yen short positions, given yen-funded carry trading has been a popular strategy over the last few years,” Saxo Capital Markets’ head of FX strategy Charu Chanana wrote in a note. “The yen is up over 4% against the US dollar, with Fed easing bets coinciding with expectations that the Bank of Japan may hike rates further at the July meeting. This potential shift in yield differentials favors the yen.”
Ultra-low interest rates in Japan have made the yen a favored funding source in recent years for carry traders. That trade is being unwound as investors bet on more rate hikes in Japan and the chance of further intervention by authorities.
“This week has seen more pronounced unwinding of carry trades, underscoring the concentration of short JPY positioning that is now facing more intense pressure from MOF intervention to support JPY,” said Richard Franulovich, head of FX strategy at Westpac Banking Corp. “Local politicians have become more vocal around the economic dangers from unfettered JPY weakness.”
Ruling Liberal Democratic Party Secretary-General Toshimitsu Motegi this week joined Minister for Digital Transformation Taro Kono in calling for higher interest rates to curb weakness in the yen.
“The comments by LDP’s Kono and Motegi add to sense of caution over a possible BOJ rate hike,” said Keiichi Iguchi, a senior strategist at Resona Holdings Inc. in Tokyo. Together with suspected yen interventions earlier this month, “a BOJ rate hike could mark the end of the yen weakness.”
Trump said in an interview with Bloomberg Businessweek that the US has a “big currency problem” because of the weakness of yen and yuan. That’s raised the prospect that he may move to weaken the greenback if he were to win elections this year.
--With assistance from Daisuke Sakai and Tania Chen.
(Updates with latest move in US trading.)
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