Japanese yen hits 24-year low against dollar

The yen plunged to its lowest level against the US dollar since August 1998 on Tuesday as leveraged funds in Europe and the US resumed bets that the Bank of Japan’s ultra loose monetary policy would continue.

After a comparatively calm morning, the yen began to drop sharply in the afternoon, plunging past the Y141/$ line to hit a new 24-year low of Y141.81/$. 

Traders in Tokyo said the trigger for the yen’s breakout was the Reserve Bank of Australia’s announcement of a half-percentage-point increase in interest rates and the accompanying signal that the central bank was still not finished with its monetary tightening cycle.

Japan has continued to defy the tightening trend among central banks and speculative investors guessed that the European Central Bank was now more likely to tighten its policy further on Thursday. This prompted a sell-off of US treasuries and added to the narrative of the BoJ’s increasing policy divergence from the rest of the world and to the attractiveness of bets against the yen. Because of the very high correlation between the yen and US treasury yields — the yen falls as yields rise — the sell-off in treasuries added technical momentum to the yen’s fall.

FX analysts also noted the timing of the yen’s move, which came soon after Tuesday’s trading began in earnest in London and ahead of the US market’s return from Monday’s national holiday. Currency strategists have observed that the strongest of the yen’s moves against the US dollar have tended to come during European and US trading hours, suggesting that the moves are not fundamentally driven by flows created by Japanese investors.

Traders said that over the course of August, leveraged funds, which had previously wagered heavily on the yen’s decline and had helped drive its long descent since March, began to reduce those positions on concerns that the rising risk of recession would cause central banks to turn more dovish. However, the US Fed signalled from the Jackson Hole meeting on August 26 that the US rate cycle was not finished and this appears to have revived the flow of speculative money into the “short yen” bet.

JPMorgan analyst Benjamin Shatil said there was now a vacuum in terms of trading barriers for the yen: “We do not rule out an eventual extension in USD/JPY toward the 1998 high of around 147, particularly now that the market is comfortable with the idea that 140 is not a line in the sand.”

Earlier on Tuesday, Japan’s finance minister Shunichi Suzuki said the yen’s sharp moves were undesirable and that he was watching the plunge with a “great sense of urgency” — remarks that closely echoed comments he made last week and which have yet to convince the market that the Japanese authorities are poised for anything more than verbal intervention.

The yen’s Tuesday move was in line with the forecasts of some analysts who have warned in recent days that there were few technical obstacles to prevent the yen tumbling beyond the Y147/$ mark.

In a note to clients entitled “Staring into the abyss”, HSBC’s senior Asia FX strategist Joey Chew noted the yen’s increasingly unusual relationship with risk indicators. The Japanese currency, said Chew, was now negatively correlated with the VIX index, meaning it weakens as equity market volatility rises.

But the phenomenon could prove temporary. “After higher terminal rates by major central banks are more fully priced in by the market, the JPY’s negative correlation with risk sentiment is likely to normalise,” wrote Chew.

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