Half-year-end flows (itsd Japan FY half year end today) are the dominant driver here, and moves of this kind can reverse once the new fiscal half begins, so the yen’s gain may prove less durable than the size of the fall suggests. The backdrop of official comments has made traders wary of pushing USD/JPY higher, and the pair had been near the upper end of its recent range before the drop. The Fed’s Williams saying there is no urgency for another hike removed a little support from the dollar, though US yields remain high and hike expectations are still firm. The Bank of Japan’s own path is the other swing factor, with the market debating whether it moves again in October.
The yen strengthened as Japan’s fiscal half-year end drove heavy repatriation flows, helped by cautious Fed commentary and official-speak that capped USD/JPY.
Summary:
- USD/JPY fell from around 157.5 to around 156.4 in Asian trade on Wednesday, a drop of about 0.7%, and other yen crosses were also lower.
- Japanese investors and exporters were selling foreign currencies ahead of the fiscal half-year end on September 30.
- The selling continued after the Tokyo fix, the daily reference rate set in mid-morning.
- Comments from Japanese and US officials late last week and early this week helped cap the pair.
- The Fed’s John Williams said on Tuesday there is no urgency to raise rates again, although he said one more increase may be appropriate late this year.
- The yen gained even though Japan’s August industrial output fell 1.7% m/m and retail sales growth slowed.
The yen strengthened in Asian trade on Wednesday, with USD/JPY falling from around 157.5 to around 156.4 and other yen crosses also lower. The move of about 0.7% was attributed mainly to flows tied to Japan’s fiscal half-year end on September 30, as Japanese investors repatriating money and exporters sold foreign currencies. The selling continued after the Tokyo fix, the daily reference rate set in mid-morning that is a focal point for corporate flows.
Official comments have also helped cap the pair. Market commentary pointed to remarks from Japanese and US officials late last week and early this week, and FXStreet reported that concern from President Donald Trump about the yen’s weakness fed speculation about another joint US-Japan intervention. USD/JPY had been consolidating around 157.5 on Tuesday after bouncing from a one-week low, with a hawkish Bank of Japan also underpinning the yen.
The Federal Reserve added to the dollar’s soft tone. New York Fed President John Williams said on Tuesday there is no need for urgency after the central bank’s September rate increase, though he said one more rise may be appropriate late this year if the economy evolves in line with his forecast. FXStreet described the remarks as dovish and said they nudged the US dollar index modestly lower, although the index stayed positive on the day. Other Fed officials leaned more hawkish, with Governor Michael Barr saying further increases are likely to be needed, and money markets still see a strong chance of a hike at the October meeting.
The yen’s gain came despite soft domestic data. Japan’s August industrial output fell 1.7% from the previous month against a forecast rise of 1.7%, and retail sales grew 2.7% from a year earlier, below the 3.3% expected. Those results would ordinarily weigh on the currency by complicating the case for tighter policy, which suggests flows rather than fundamentals are driving the move. The Bank of Japan raised its policy rate to 1.25% in September, the highest since 1995, and a former BoJ executive director has put the chance of another increase in October at 20% to 30%.
Traders are likely to watch how the pair behaves once the new fiscal half-year begins on Thursday, as repatriation flows of this kind can fade quickly. Further official comments from Tokyo and Washington, US data and the next steps from the Fed and the Bank of Japan remain the key swing factors.
This article was written by Eamonn Sheridan at investinglive.com.