The Japanese yen rose in Asian trading on Tuesday against a basket of major and minor currencies, putting it on track for its first gain in three sessions against the US dollar. The move helped the currency pull further away from its lowest levels in 40 years, renewing speculation about whether Japanese authorities could step in to support the local currency.
With inflationary pressures easing on policymakers at the Bank of Japan, expectations for an interest rate hike at the central banks July meeting have declined, as investors await additional economic data from the worlds fourth-largest economy.
The Price
USD/JPY today: The dollar fell around 0.25% against the yen to 161.69, compared with an opening level of 162.07, after touching an intraday high of 162.18.
The yen ended Monday down 0.45% against the dollar, marking its second consecutive daily loss.
The Japanese currency hit a 40-year low of 162.84 per dollar last Wednesday before entering a short-term recovery phase that fueled speculation about possible intervention in the foreign exchange market.
Japanese authorities
The yen has once again come under the spotlight after approaching its weakest levels since 1986 against the US dollar, increasing expectations that Japanese authorities may intervene to prevent excessive weakness in the currency.
Views and analysis
Analysts at OCBC believe the risk of intervention is more likely to trigger bouts of volatility and temporary corrections rather than create a lasting reversal in the USD/JPY trend.
They added that without a meaningful shift in economic fundamentals, verbal warnings or even direct intervention alone are unlikely to alter the broader direction of the currency pair.
Marc Chandler, Chief Market Strategist at Bannockburn Global Forex, said the market remains aware of the risk of intervention by Japanese authorities.
Chandler added that options market activity still shows signs of major investors buying short-term dollar put options as a hedge to protect long-dollar positions in the event of official intervention.
Lee Hardman, Senior Currency Analyst at MUFG, said there had been speculation late last week that Japan might intervene to support the yen during the US holiday period when trading conditions were less liquid. However, no action was taken, which contributed to the yen giving back part of its recent gains.
Japanese interest rates
Market pricing currently implies less than a 25% probability that the Bank of Japan will raise interest rates by 25 basis points at its July meeting.
Investors are awaiting further data on inflation, unemployment and wage growth in Japan to reassess those expectations.