The yen is hovering around its lowest price in 34 years, and the recent slight drop in the US dollar didn’t do much to correct the Japanese currency rate compared to other majors. Meanwhile, Japanese officials agreed that action would be necessary soon, but the main question is when.
This week, the US dollar decreased slightly due to weak Purchasing Managers’ Index data. The chart below shows major Asian currency pairs with the USD. As you can see, the Australian and New Zealand dollars surged against the US dollar, but the USDJPY pair hardly budged, with the USD even continuing its climb.
However, this trend has persisted for a long time. Take a look at last year's data in the next picture, with more than a 15% increase over 12 months. From 130 yen to a dollar, to 135, 140, 145, and now 150 – all these levels seemed excessive, and yet here we are.
“Here” being at a 34-year low. The yen hasn't been this cheap since the eighties.
The situation is extraordinary, to say the least. That’s why market participants eagerly await the Bank of Japan's next move.
At the same time, more and more analysts are aligning with the view that the US dollar will outperform expectations. There's a diminishing belief that the Federal Reserve will initiate an interest rate decline cycle before other major central banks. The prevailing sentiment now is that the Fed will delay its rate cuts, with the European Central Bank likely to move earlier. Additionally, inflation in the US remains high, and the domestic economy has proven to be stronger than many anticipated.
The Bank of Japan has taken some action, lowering the key rate for the first time since 2007. However, this move didn't have much impact on the rate, as the market had already priced it in. Nevertheless, the yen has reached a new critical psychological level, prompting investors to monitor the central bank's next steps closely.
Currency interventions used to be a common answer to such situations. The last intervention happened in 2022, and now, it might be a moment to resume this practice. For many experts, the answer seems clear, but the question remains: At what level will Japanese authorities pull the trigger? Some market participants believe 155 is sufficient. So, will it be 160? Or more? Or somewhere in between? Where's the tipping point?
We find ourselves at this juncture, and the ensuing market movements could be diverse. If you're looking to capitalize on it, keep a close eye on economic events and conduct your own thorough analysis.