Yen dives as BOJ hints no rate hikes while markets are volatile

Yen dives as BOJ hints no rate hikes while markets are volatile/Reuters

Reuters | August 7, 2024 | 11:39 AM IST | Breaking News | Follow on Google News

Yen dives as BOJ hints no rate hikes while markets are volatile

Yen dives as BOJ hints no rate hikes while markets are volatile

SINGAPORE, Aug 7 (Reuters) – The yen slumped on Wednesday after an influential Bank of Japan official played down the chances of a near-term rate hike in a fresh twist to the week that started with massive moves driven by U.S. recession fears and unwinding of popular carry trades.

The yen was down more than 2.35% at 147.80 per dollar having touched session lows of 147.935 following the comments from BOJ Deputy Governor Shinichi Uchida.

“As we are seeing sharp volatility in domestic and overseas financial markets, it’s necessary to maintain current levels of monetary easing for the time being,” Uchida said.

His remarks, which contrasted with Governor Kazuo Ueda’s hawkish comments made last week when the BOJ unexpectedly raised interest rates, sent the Nikkei (.N225), opens new tab higher and weighed on Japanese government bond yields.

The BOJ’s hike last week along with bouts of interventions from Tokyo in early July led investors to bail out of once-popular carry trades, in which traders borrow the yen at low rates to invest in dollar-priced assets for higher returns.

That took the yen to a seven-month high of 141.675 per dollar on Monday, from the 38-year lows of 161.96 it was languishing in just at the start of July.

But Uchida’s comments could still prop up the carry trade, investors say, even with more room for unwinding of the trades.

“Uchida has saved the carry trade – for now,” said Rong Ren Goh, a portfolio manager in the fixed income team at Eastspring Investments.

“There are also other moving parts, but yes, Japan policy is one of the important moving parts of the overall risk structure in the market. The other important ones would be U.S. economic data, which in turn informs Fed policy trajectory.”

The yen’s decline was broad based, with the Mexican peso, New Zealand dollar and Australian dollar – all carry trade candidates – surging against the yen. Euro and sterling were also higher on the yen.

The swing in yen positioning seen over the last one month was among the largest on record, according to strategists at JP Morgan, with their models suggesting 65% of yen shorts have now been covered as of Aug. 6.

Mark Matthews, head of research for Asia at Julius Baer, said there is no real need for the BOJ to continue raising interest rates much more than it has done already.

“After the dust settles, the very wide interest rate differential between Japan and other countries will once again become the primary determination of the yen’s valuation versus other currencies.”

Reuters