As the yen falls again towards the 160 mark this week, almost all traders in the foreign exchange market are currently focused on when the Japanese authorities will intervene in the yen exchange rate again.
From a time window perspective, many Wall Street insiders suggest that the next "big pain point" for the yen, or the potential trigger for Japanese intervention, is likely to fall on the Federal Reserve's most favored inflation indicator this Friday.
Since the beginning of this week, the Japanese yen against the US dollar has been in danger of falling below the 160 mark and reaching the lowest point of the year, which has increased the pressure for the Japanese authorities to take action. But traders believe that any move to support the yen by entering the market too early will be high-risk, as Friday's PCE price data will be key to affecting the outlook for US interest rates and thus determining the trend of the yen.
Takafumi Onodera, Sales and Trading Director at Mitsubishi UFJ Trust Bank in New York, said, "The Japanese authorities will at least wait until Friday when the PCE is announced before deciding whether to intervene, even if the yen has fallen below 160. A higher than expected PCE report may stimulate market volatility, causing the yen to plummet to 163 and prompting Japanese officials to announce a 'exchange rate check', or to act directly during Friday's New York session in the face of liquidity scarcity, as they did last time."
The Japanese authorities have spent a record breaking amount of approximately 9.8 trillion yen (approximately 61.4 billion US dollars) in two rounds of intervention in April and May this year. The current trend of the Japanese yen exchange rate is of great significance to the Japanese economy. The weakness of the yen is harming Japanese consumers and causing increasing anxiety among businesses.
Japan's highest level foreign exchange official and Deputy Minister of Finance, Makoto Kanda, warned on Monday that the Japanese government is prepared to intervene in the foreign exchange market 24/7 if necessary. "If there is excessive currency volatility, it will have a negative impact on the national economy. Once there is speculative excessive volatility in the Japanese yen, we are prepared to take appropriate action."
Generally speaking, the decision to intervene in the foreign exchange market will be made by the Ministry of Finance of Japan, and the Bank of Japan will act as the actual agent for market buying and selling operations.
Observing data performance
ATFX Global Markets trader Nick Twidale stated that PCE data will be crucial. If they (Japanese officials) intervene before this, it would be very crazy - they will try to avoid taking any action before PCE. Twidale has been engaged in foreign exchange trading for 25 years.
At present, the huge interest rate difference between the United States and the Japanese yen remains the fundamental reason for the weakness of the yen. Despite foreign exchange intervention by the Japanese authorities in the second quarter, the yen is still under tremendous pressure.
The team led by Citigroup analyst Takashima Osamu wrote in a report that "Japan's decisions now depend on two variables - the speed of yen depreciation and the level of exchange rate - rather than just one as before." This means that "there is almost infinite possibility of when and at what level the Japanese Ministry of Finance will intervene."
Citibank analysts predict that if the yen exchange rate rapidly approaches 162 points in the next few days, Japan will intervene and buy the yen, but a slower decline is unlikely to stimulate intervention.
In addition, timing is also crucial. Friday afternoon in New York marks the end of the full trading session of the week, and market liquidity is usually poor. If Japan decides to take action at that time, it may have a greater impact.
Michael Brown, strategist at Pepperstone Group Ltd., believes that intervening during periods of poor liquidity can "yield greater returns.".
Of course, a current favorable background for the yen is that Friday's PCE data may not necessarily be a bearish one - it is expected that the data will show signs of further cooling of US inflation, which will support the Federal Reserve's earlier interest rate cuts this year and alleviate some of the depreciation pressure on the yen. The median estimate from economists shows that the year-on-year increase in the core PCE price index in the United States is expected to slow down to 2.60% in May.
Helen Given, a forex trader at Monex Inc., said, "Considering that the US dollar is very close to the psychological level of breaking through 160 against the Japanese yen, the Bank of Japan may intervene on Friday. Market conditions may make the intervention more effective, but unless the yen drops significantly again this week, I am not sure if intervention will occur."