(Bloomberg) — The yen has underperformed all its Group-of-10 peers this month as the boost from recent intervention fades, putting traders on alert for further official action.
Japan’s currency has weakened about 0.5% against the dollar in August, reversing part of a 3.2% gain in July. It briefly rallied after a softer-than-expected US payrolls report on Friday pressured the greenback, only to resume its decline soon after.
With Japan observing a holiday on Tuesday, traders are also wary that thinner liquidity could create conditions for another bout of intervention. Still, yen weakness looks likely to persist despite the historic US-Japan joint intervention, given the major headwinds facing the currency such as concern that Japan may boost fiscal spending.
“Japan will be in the Obon holiday period which could limit market participation, while the domestic event calendar is relatively light,” Nomura Securities Co. strategists including Yujiro Goto wrote in a note. “Attention will remain on the intervention stance of Japanese and US authorities, with investors closely watching comments from officials.”
Japan and the US carried out their first coordinated yen-buying intervention since 1998 near the start of this month after the currency slid to a four-decade low near 164 per dollar. The operation drove the yen as strong as around 155 before the move began to unwind, with the currency now trading weaker than 158.
The reversal highlights the limits of intervention in changing the yen’s broader trajectory when the forces behind its decline remain largely intact. Wide interest-rate differentials with the US, concerns over Japan’s fiscal outlook and geopolitical uncertainty continue to weigh on the currency even as officials in Tokyo and Washington warn they are prepared to act again if needed.
Read: US-Japan Real Rate Gap Is Just Too Wide for Yen
“We think the relatively muted response to the intervention reflects the fundamental reasons for the currency’s weakness,” Goldman Sachs Group Inc. strategists including Kamakshya Trivedi wrote in a note. They expect “depreciation pressures to reemerge over time absent a shift in global conditions or a policy surprise.”
The Bank of Japan, meanwhile, flagged rising risks of inflation heating up in a summary of opinions from its July meeting, with one board member pointing to the possibility of an acceleration in the pace of interest rate hikes. Overnight-index swaps show traders pricing about a 66% chance of an increase by September, with an October move almost fully priced.
Authorities likely used around $34 billion intervening in the currency market to support the yen on July 31, a Bloomberg analysis of central bank accounts indicates. The action came after authorities spent an estimated $53 billion the previous day, in what would likely be the largest single-day intervention on record if confirmed.
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