The yen rose to about 3 percent shy of the level it was trading at before the surprise monetary easing step the Bank of Japan took in October 2014 saw it tumble. Traders are now wondering if policymakers will seek to arrest gains that threaten to undermine years of unprecedented monetary stimulus.
The currency has strengthened at least 2 percent against all its 16 major peers this month, with its biggest gains versus the Mexican peso, South African rand and the dollar. While Japanese markets were closed for a public holiday Thursday, traders will watch for comments from officials, given the yen’s strength, BNP Paribas SA said. HSBC Holdings Plc warned there’s a growing risk that the BOJ will step in to sell yen or cut interest rates, while Morgan Stanley sees authorities limiting themselves to warning investors against pushing the exchange rate too far.
“Markets appear to be testing the resolve of the BOJ and questioning the ability of monetary policy action to create a weakening Japanese yen,” said Sam Tuck, a senior currency strategist at ANZ Bank New Zealand Ltd. in Auckland. “Nobody really wants their currency bouncing around too rapidly. That in itself, irrespective of the level, does suggest that there could be some smoothing action just to slow it down.”
Kuroda kicked off an unprecedented campaign of “qualitative and quantitative” monetary easing in April 2013, shortly after taking the helm of the BOJ.
The yen has climbed against almost all the approximately 150 currencies tracked by Bloomberg this year as evidence China is slowing and concern that the creditworthiness of banks is worsening drives investors into havens. Almost $8 trillion has been wiped from global stocks this year, while around 30 percent of global sovereign bonds — another relatively safe asset — now yield less than zero.
The BOJ unexpectedly said Jan. 29 it will follow the European Central Bank by adopting negative interest rates, causing a brief slump in the yen. Its surprise easing in October 2014 has had a more sustained impact, helping drive the currency to a 13-year low of 125.86 on June 5, 2015.
Intervention in the currency markets would be a major event for Japan. The nation hasn’t bought or sold currency to sway the yen’s price since a record intervention in 2011 helped stop its advance to a post-World War II record.
A gauge of the dollar dropped to the lowest since November after Federal Reserve Chair Janet Yellen signaled market turmoil may deter policymakers from making multiple interest-rate increases this year.
The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 peers, fell as much as 0.2 percent before paring declines to be little changed.
There’s about a 30 percent probability the Fed will raise interest rates in 2016, according to futures data compiled by Bloomberg. The odds were more than 90 percent at the end of last year.
“We don’t see Fed hikes being priced in again any time soon as it will likely take a significant and sustained improvement in market sentiment to change the market’s view on the subdued prospects for global growth,” BNP Paribas strategists, led by Steven Saywell, global head of foreign-exchange strategy, wrote in a note Thursday. “The dollar is likely to continue to struggle” against the yen and euro, he said.
Action from the BOJ would likely roil other nations that are already dealing with the fallout of China’s unexpected currency devaluation last August. In recent weeks, India and Kenya have called for coordinated action by monetary authorities of Group of 20 nations to address the turbulence in foreign exchange markets this year.
“Markets clearly want to test further lower” on the dollar against the yen, ANZ’s Tuck said. “One of the things holding it up is that perception of the possibility there’ll be some smoothing action from the Bank of Japan or some official support for dollar-yen.”