The Japanese yen strengthened against the dollar this week, but Bannockburn Capital Markets strategist Marc Chandler warns the rally could reverse once the Bank of Japan actually delivers an anticipated rate hike. The move has also revived speculation of a fresh currency intervention, echoing the estimated $85 billion operation Japan and the U.S. Treasury carried out in July.
The yen strengthened by about 1.5% between Tuesday and Thursday this week against the dollar, yet Chandler told CNBC on Friday the gain may not hold. Markets are pricing in an interest rate hike from the Bank of Japan later this month, and Chandler said the hike itself could spark renewed weakness rather than strength.
Rate-hike bets could backfire
Chandler pointed to the New Zealand dollar, which sold off following a Wednesday rate hike from that country's central bank, and said the yen could follow the same pattern. According to CNBC: "I think the same thing could happen on a BOJ rate hike", Chandler said, describing the setup as a possible buy-the-rumor, sell-the-fact situation.
He noted that the Bank of Japan has raised interest rates to 1% from 0% over the past few years, and the yen has generally declined over that same period despite the hikes.
Intervention speculation resurfaces
This week's yen appreciation has also prompted speculation of a government currency intervention, similar to the one in July, though hawkish comments from a Japanese monetary policymaker were likely also a factor. The July intervention, an estimated $85 billion operation carried out by Japan alongside the U.S. Treasury on July 30 and 31, was described by Goldman Sachs analysts as the biggest currency market intervention in 15 years in an August 12 research note.
After that intervention, the yen strengthened against the dollar by roughly 3.5% between July 29 and July 31. It then reversed, falling by nearly 2% between August 3 and September 1 to about 160 yen per dollar.
On Monday, U.S. Treasury Secretary Scott Bessent told CNBC he thought Japanese authorities would take action that would result in a stronger yen. BOJ board member Hajime Takata added to the move, saying Wednesday that future rate hikes should be conducted in a nimble and data-dependent manner, according to the Wall Street Journal.
Bond market pressures in the background
Former IMF chief economist Maurice Obstfeld told CNBC on Thursday that bond market pressures likely affected the July currency move. Japan is the top foreign holder of U.S. public debt, and if it sells Treasurys to buy yen, it could push up long-term U.S. interest rates already under strain from rising energy costs and their effect on inflation, as well as growing concern over the size of U.S. fiscal deficits.
Source: CNBC
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