Safe haven flows push Japanese yen closer to 150 vs. USD

Japanese yen edges closer to crucial 150 level against USD on safe haven flows

The Japanese yen has slipped below 149 per dollar, edging closer to the critical 150 level that might trigger authorities to intervene in the currency markets to bolster the JPY. This depreciation is driven by mounting pressure from the strong U.S. dollar, which is further supported by robust economic data in the United States. Recently released retail sales came in better-than-expected, reinforcing expectations that the Federal Reserve (Fed) will maintain higher interest rates for a longer period of time, increasing the greenback’s appeal.

Naoyuki Shinohara, Japan's former top currency diplomat, recently told Reuters that the country is unlikely to take steps to reverse the yen's declining trend through exchange-rate intervention:

"Japanese authorities are well aware that they can't reverse the market's tide when the yen's decline is driven by economic fundamentals. When you have steady yen falls over a protracted period, that's usually a trend driven by fundamentals," he said on the yen's recent declines.

Earlier in October, the yen surged by as much as 1.7% to 147.3 against the dollar, with some traders speculating that it might have been a result of currency intervention by the Japanese government. However, data from the central bank did not support these speculations. Reuters suggested that this event may have been a mere rate check by the Bank of Japan during the New York session, leading banks that typically manage interventions to respond by selling USD/JPY in large quantities.

Tokyo is facing renewed pressure to address the prolonged depreciation of the yen, driven by investors anticipating persistently elevated U.S. interest rates, juxtaposed with the Bank of Japan's commitment to its ultra-low interest rate policy.

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USD strength: Safe-haven flows push dollar higher

The prospect of further escalation in the Middle East has propelled safe-haven demand for the USD in recent weeks. The DXY dollar index, which measures USD strength against six major peers, has traded above 106 since markets opened on October 9 — two days after the surprise Hamas attack on southern Israel.

The geopolitical pressure has also led to a spike in oil prices as markets fear supply disruptions and the potential involvement of other countries in the conflict.

Alessia Berardi, head of emerging markets macro and strategy research at Amundi told Reuters said the prospect of Iran’s involvement in a wider war in the Middle East may lead to a renewed inflation spike:

"If Iran gets involved that means higher commodity prices, higher external shocks, and this is a trigger for a less disinflationary outlook”.

While Amundi stressed that was not her base case, she added that the dollar may not be a one-way bet if high oil prices and inflation trigger a U.S. recession.

Trevor Greetham, head of multi-asset at mutual insurer Royal London Group, said any "global risk-off move" could also strengthen the yen as "Japanese investors pull their money home”.

USDJPY forecast: ING says 150 could be a “line in the sand” for Bank of Japan

In their latest edition of the FX Talking overview, currency strategists at Dutch bank ING outlined that 150 yen per dollar appears to be a key mark for Japanese policymakers — a so-called “line in the sand” that may prompt them to intervene in the market:

“Unless formally in an exchange rate mechanism (e.g. ERM-II) FX market players do not generally subscribe to ‘lines in sand’ – i.e. key FX levels which are protected by FX intervention. Yet last year Japanese authorities sold $37bn on the day $/JPY traded over 150. And recently $/JPY sold off 2% from just above 150 on suspected intervention. We’ll find out whether intervention did indeed take place when new data is released on 31 October”.

“31 October will also play a key role in the calendar given it is a Bank of Japan policy meeting, including new CPI forecasts. Speculation will build that dovish policy can be further reversed. However, expect $/JPY to stay near 150 until the $ turns in 1Q24”.

At the time of writing, the U.S. dollar index, or DXY, was trading at 106.41 (up 0.15% on the day), while the dollar to yen rate traded at 149.70, as per MarketWatch data.