"Verbal Intervention" Escalates! Is the Bank of Japan about to turn hawkish?

Last week (9/4-9/8), the US Dollar Index rose by 0.82%, while most non-US currencies experienced a decline. Specifically, the Euro depreciated by 0.7% against the US dollar, and the Japanese Yen weakened by approximately 1.1%.

【Source: MacroMicro；Date2023/9/4-2023/9/8】

【Source: MacroMicro；Date2023/1/1-2023/9/8】

Supported by a series of strong economic data, the US dollar index recorded its eighth consecutive weekly gain, while the euro continued to decline under the drag of a weak economy. Last week, the euro fell 0.7% against the US dollar, marking its eighth consecutive weekly decline.

Data from September 5th showed that the Eurozone composite PMI reached a 33-month low at 46.7, with the services PMI hitting a 30-month low at 47.9. In contrast, the US non-manufacturing ISM for August exceeded expectations and reached a six-month high of 54.5.

【Source：MacroMicro 】

The economic data indicates that Europe is heading towards a recession, and market expectations suggest that the European Central Bank (ECB) will pause its rate hikes this week. The derivatives market implies a 35% probability that the ECB will raise the deposit rate from 3.75% to 4% on September 14th.

Major investment banks have turned bearish on the euro, with institutions like Bank of America and JPMorgan lowering their euro-to-dollar forecasts to 1.05. Societe Generale even predicts that the exchange rate could fall to 1.02 dollars, not far from the lowest level reached in the past twenty years.

Athanasios Vamvakidis, Head of G10 FX Strategy at Bank of America, stated that the economy is visibly weakening while core inflation remains stagnant, which undoubtedly raises concerns for the euro.

Mitrade Analyst：

This week, the focus will mainly be on the US August CPI data and the ECB interest rate decision meeting. The potential changes in the terminal interest rates set by the ECB and the Fed will continue to have a significant impact on the EUR/USD exchange rate. If the ECB chooses not to raise interest rates, it will keep the euro under pressure.

From a technical perspective, the EUR/USD has fallen below the 200-day moving average and reached around the previous low of 1.07. Considering that the RSI indicator is approaching the oversold area, there might be some rebound for the euro this week, with resistance at 1.08 and support around 1.06.

【Source：TradingView】

Last week, as the depreciation of the yen accelerated, there was an escalation in the level of "verbal intervention" by the Japanese authorities compared to before.

On September 6th, Kanda Masato, the director of foreign exchange at the Ministry of Finance, stated that if the exchange rate continues to experience drastic fluctuations, they would not rule out any corresponding measures. The statement influenced the USD/JPY rate, causing a slight decline, but it later returned to an upward trajectory.

On September 8th, Shunichi Suzuki, the Japanese Minister of Finance, expressed that they did not want excessive exchange rate volatility and that the government is closely monitoring changes in the currency market with high vigilance, while not excluding any options to respond to significant fluctuations. Following Suzuki's remarks, there were relatively large exchange rate movements, with the USD/JPY briefly declining from around 147.30 to around 146.60, but later resuming its upward trend.

【Source：MacroMicro ；Strong Dollar Leads to Depreciation of the Yen】

On September 9th, Bank of Japan Governor Ueda Kazuo stated that ending negative interest rates is one of the viable options if the central bank has confidence that prices and wages will continue to rise. The Bank of Japan will not overlook the risk of inflation exceeding expectations and added that wage increases have begun to push up service prices, with the key being whether wages will continue to rise next year. As for the timing of ending negative interest rates, the possibility of obtaining sufficient information and data before the end of the year cannot be ruled out.

Kazuo's speech raised market expectations of Japan's departure from negative interest rates, causing the yen to briefly appreciate against the US dollar by 0.8% at Monday's opening.

However, Barclays predicts that the threshold for the US-Japan exchange rate that would prompt genuine action from the Japanese government could be around 150.

Mitrade Analyst：

The possibility of the Bank of Japan abandoning its Yield Curve Control (YCC) policy and exiting negative interest rates (raising rates from -0.1% to 0.0%) in the coming months is increasing, and investors should take note. Additionally, while Mr. Kazuo's speech favors the appreciation of the yen, it is also important to consider the impact of the strength of the US dollar and carry trades. Due to the relative strength of the US dollar, we expect the USD/JPY exchange rate to continue its range-bound volatility in the short term, with a range of 145-149.

From a technical perspective, the USD/JPY is oscillating above the 21-day moving average, indicating that bulls still have some advantage. However, the MACD indicator suggests increased indecision, thus the probability of continued oscillation is high. It is expected that the USD/JPY will retest the 147 level this week, followed by high-level volatility.

【Source：TradingView】