Yen rallies on bets BoJ will tweak yield curve controls

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The yen strengthened past ¥140 against the dollar on Wednesday on bets from currency and bond traders that the Bank of Japan could soon begin its pivot away from its ultra-loose monetary policy.

The 3.5 per cent rise to ¥139.5 against the dollar in July set the Japanese currency on a tentative course for its best month since the country’s finance authorities intervened late last year to prop up the currency.

Yield on the 10-year Japanese government bond also climbed as much as 0.02 percentage points on Wednesday to 0.47 per cent, the highest level since late April.

“There’s a degree of unease as the calendar ticks towards the BoJ meeting [on July 28],” said Sean Callow, senior currency strategist at Australian bank Westpac. Callow said any adjustment to the central bank’s yield curve controls would cause a “very steep fall” for the dollar against the yen, adding that “the recent price action suggests there is a lot of fear”.

BoJ deputy governor Shinichi Uchida told the Nikkei last week that the central bank was seeking “a balanced decision [on the YCC] with an eye on monetary interventions and market functions”, building up market expectations that the central bank would adjust its yield curve controls.

The policy, in place since 2016, entails the BoJ intervening to hold down yields on benchmark 10-year Japanese government bonds.

Following the interview, Morgan Stanley, MUFG and UBS said there was an increased likelihood of the central bank further loosening the YCC’s target ceiling, after it was lifted to 0.5 per cent last December.

The yen’s rise on Wednesday also came ahead of the much-anticipated release of US inflation data for June that investors will scrutinise for clues about the future path of the US Federal Reserve’s interest rate rises.

The rally for the yen this month has erased the entirety of its fall during June, which had pushed the currency past the ¥145 per dollar mark and closer to ¥150, a level that prompted the central bank to prop up the currency by selling $65bn of foreign reserves in October.

In the wake of the three-month rally that followed, confidence in the yen has wavered, prompting speculation that the central bank could intervene again.

Strategists said the latest gains in the yen were driven by hopes that the BoJ would tweak its policy, as well as speculation over the slowing of rate rises by the US Fed.

“Both hedge funds and real money asset managers are quite short the yen,” said Westpac’s Callow. “Taking profit seems wise from these levels — and the more you see everybody else take profit, the more pressure it puts on you to do so as well.”

If the BoJ makes no change in its YCC policy and if the upcoming US inflation data does not support slowing rate rises, the yen could quickly bounce back to a range of ¥140 to ¥145 per dollar, said Kenta Tadaide, a senior foreign exchange strategist at Daiwa Securities.

That would put investors back on alert for a possible market intervention by Japanese authorities to support the currency, he added.