Could Friday’s data boost the ailing yen as intervention is touted? – Forex News Preview
July 5, 2023 10:31 am
With the market focused on Friday’s US labour market data, speculation is rife that the Japanese finance ministry is preparing to intervene in the FX market to prop up the yen. Friday’s Japanese data releases could delay this likely intervention, allowing the Bank of Japan to potentially go into action at its end-of-July meeting and help the yen record a decent comeback against the euro.
What has been happening lately?
Intervention has become the latest buzzword in the market as the yen continues its underperformance against the major currencies. In the meantime, the biggest investment banks are in the race to identify likely tipping points that would force the Japanese Ministry of Finance to act. Apparently, we have not reached that stage yet as Japanese officials are sticking to verbal intervention for now.
To be fair, there has been an escalation of rhetoric from government officials lately, with the July 4 comment from the Vice Minister of Finance Kanda revealing communication with the US authorities. This communication could have been just an update on Japan’s intervention plan and/or a request for assistance. With Japan removed from the US Treasury’s semi-annual currency manipulation list in mid-June, the door is wide open for a market intervention, should the time come.
Amidst these developments, and the market expecting more aggressive commentary from Japanese officials, the BoJ has decided to take a back seat. While we have discussed the reasons that the BoJ likes a weaker yen – higher imported inflation keeps domestic inflation elevated – the recent Summary of Opinions showed that one BoJ member talked about loosening the Yield Curve Control mechanism. This comment got market participants excited that the July meeting could finally bring some changes by the BoJ.
Earnings data in the spotlight
Bank officials, including Governor Ueda, have not shut the door to such an outcome as they have set their eyes on the July inflation forecasts and the economic data releases. The latter have been mixed but last week’s Tokyo CPI for June finally offered some respite to the BoJ hawks. Crucially, on Friday, we will get labour cash earnings and the overall household spending data for the month of May.
These datasets have been getting plenty of attention lately as wages monopolize discussions among central bankers across the globe. Labour cash earnings are expected to show a 0.7% year-on-year increase, recording the longest phase of growth since the 2017-2019 period. Overall household spending has been less impressive, but the May figure could pick up some momentum following the higher wage agreements made in April 2023.
Yen stabilizing at elevated levels
The aggressive rally in euro/yen appears to have halted as this pair is hovering below the 157.99 area for the past six trading sessions. Verbal intervention could be having some effect, but the absence of a proper correction is not an optimistic sign for the yen bulls.
A positive set of data on Friday, and particularly a jump in the labour cash earnings, would be greatly welcomed at the BoJ corridors, allowing the market to freely speculate on the likely announcements at the next BoJ meeting. As a result, yen bulls could make a push towards the June 23 low at 155.05. On the other hand, weak data could disappoint the growing BoJ’s expectations, but the market’s fixation with a possible currency intervention will most likely keep the yen losses at a minimum.
With the market focused on Friday’s US labour market data, speculation is rife that the Japanese finance ministry is preparing to intervene in the FX market to prop up the yen. Friday’s Japanese data releases could delay this likely intervention, allowing the Bank of Japan to potentially go into action at its end-of-July meeting and help the yen record a decent comeback against the euro.
What has been happening lately?
Intervention has become the latest buzzword in the market as the yen continues its underperformance against the major currencies. In the meantime, the biggest investment banks are in the race to identify likely tipping points that would force the Japanese Ministry of Finance to act. Apparently, we have not reached that stage yet as Japanese officials are sticking to verbal intervention for now.
To be fair, there has been an escalation of rhetoric from government officials lately, with the July 4 comment from the Vice Minister of Finance Kanda revealing communication with the US authorities. This communication could have been just an update on Japan’s intervention plan and/or a request for assistance. With Japan removed from the US Treasury’s semi-annual currency manipulation list in mid-June, the door is wide open for a market intervention, should the time come.
Amidst these developments, and the market expecting more aggressive commentary from Japanese officials, the BoJ has decided to take a back seat. While we have discussed the reasons that the BoJ likes a weaker yen – higher imported inflation keeps domestic inflation elevated – the recent Summary of Opinions showed that one BoJ member talked about loosening the Yield Curve Control mechanism. This comment got market participants excited that the July meeting could finally bring some changes by the BoJ.
Earnings data in the spotlight
Bank officials, including Governor Ueda, have not shut the door to such an outcome as they have set their eyes on the July inflation forecasts and the economic data releases. The latter have been mixed but last week’s Tokyo CPI for June finally offered some respite to the BoJ hawks. Crucially, on Friday, we will get labour cash earnings and the overall household spending data for the month of May.
These datasets have been getting plenty of attention lately as wages monopolize discussions among central bankers across the globe. Labour cash earnings are expected to show a 0.7% year-on-year increase, recording the longest phase of growth since the 2017-2019 period. Overall household spending has been less impressive, but the May figure could pick up some momentum following the higher wage agreements made in April 2023.
Yen stabilizing at elevated levels
The aggressive rally in euro/yen appears to have halted as this pair is hovering below the 157.99 area for the past six trading sessions. Verbal intervention could be having some effect, but the absence of a proper correction is not an optimistic sign for the yen bulls.
A positive set of data on Friday, and particularly a jump in the labour cash earnings, would be greatly welcomed at the BoJ corridors, allowing the market to freely speculate on the likely announcements at the next BoJ meeting. As a result, yen bulls could make a push towards the June 23 low at 155.05. On the other hand, weak data could disappoint the growing BoJ’s expectations, but the market’s fixation with a possible currency intervention will most likely keep the yen losses at a minimum.
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