Japanese Yen is still in the spotlight. Should you buy it?

The U.S. dollar climbed up on Thursday. Traders’ expectations for aggressive Federal Reserve monetary tightening supported it. However, the greenback was well off the previous day’s highs due to concerns about what G7 might say about its rapid appreciation.

The dollar soared by 0.34% to 128.305 yen after hitting a two-decade high of 129.430 on Wednesday. The Bank of Japan stepped into the bond market for the third time in three months, attempting to defend its zero-percent yield target. The BOJ is drawing a stark contrast with the U.S. Federal Reserve’s increasingly hawkish posture.

On Thursday, Finance Minister Shunichi Suzuki declared in Washington D.C. that he had already explained the Japanese yen’s somewhat rapid decreases to his Group of Seven counterparts. But he did not comment on how they reacted. Suzuki has warned in recent days about the potential damage to the Japanese economy from its struggling currency. He is due to meet U.S. Treasury Secretary Janet Yellen this week. Meanwhile, traders decided to pare back bearish yen bets.

The dollar index surged forward by 0.16% to 100.50 against the basket of six peers, including the Yen. It retreated from a more than two-year high of 101.03 hit in the previous session but still managed to gain. 

Benchmark Treasury yields lowered from the highest level since December 2018 at close to 3%, also allowing the greenback to ease overnight. Those yields, though, climbed higher in Tokyo trading on Thursday.

Westpac strategists noted that few central banks would match the Federal Reserve for policy increases and balance sheet retrenchment this year, making for a dramatic policy differential in the dollar’s favor. They added that the dollar index should remain bid in this environment.

What are the Federal Reserve’s officials saying?

On Wednesday, San Francisco Fed President Mary Daly noted that she believed the case for a half-percentage-point rate increase next month is complete and solid. Recent comments from other Fed officials are also backing bigger rate hikes. Considering these reports, Forex markets are priced for half-point increases in both May and June.

On the other hand, the BOJ offered to buy unlimited amounts of 10-year Japanese government bonds for four straight sessions on Wednesday. Yields bumped against the 0.25% maximum leeway around its zero-percent target, showing the bank’s commitment to ultra-easing stimulus settings. The BOJ’s policy meeting is due the next week.

BOJ Governor Haruhiko Kuroda thinks that a weak yen is overall good for the economy. However, he reiterated that currency volatility could hurt business activity on Thursday.

According to Adam Cole, the chief currency strategist at RBC Capital Markets, Japanese policymakers have not fully utilized their verbal intervention toolkits. The next phase would typically involve describing moves as speculative, along with threatening to take decisive action. He thinks that if they get to that point, the hurdle for the next logical step of physical intervention may be lower than it’s perceived now.

However, whether intervention would work is another story. Cole thinks that it could restore some short-term balance to FX markets, as well as manage the pace of JPY depreciation. But longer-term, there is no prospect of the central bank mopping up all of the JPY selling within Japan as the Fed’s hiking cycle gets underway.

The Euro declined today. How is Sterling faring?

The common currency shaved off 0.19% to $1.0832 on Thursday. The British Pound also tumbled down by 0.13% to $1.3052. In Asia, the Australian dollar lowered by 0.25% to $0.74325. The New Zealand dollar also plummeted by 0.30% to $0.67845 as softer-than-forecast consumer price data weighed on it.

Furthermore, the onshore Chinese yuan traded under pressure, dropping as low as 6.4449 per dollar for the first time since October 13. More and more analysts are cutting Chinese growth forecasts. On Thursday, Shanghai authorities stated that the number of coronavirus cases outside quarantined areas in the city increased again. They warned that tough lockdown restrictions would remain in place even in districts managing to cut transmissions to zero.

Bearish bets firmed on most Asian currencies as several regional central banks are tightening their monetary policies to combat red-hot inflation. However, experts turned short on the Chinese yuan for the first time since early-October due to concerns of an economic slowdown in the country. COVID-19 lockdowns may soon cause the latter.