A Blast of Suspected Intervention: Dollar Shrugs Off Japan’s Efforts, Pound Eyes UK Politics
Yen Volatility and Dollar Resilience
A suspected intervention by the Bank of Japan (BOJ) on Monday aimed at boosting the yen had little effect on taming the dollar. Meanwhile, the pound experienced fluctuations as former finance minister Rishi Sunak emerged as the front-runner for the next British prime minister.
BOJ Intervention and Yen’s Rollercoaster Ride
The yen hit a low of 149.70 per dollar overnight but quickly surged to a high of 145.28 within minutes, indicating potential intervention by the BOJ on behalf of Japan’s Ministry of Finance (MOF). Despite these efforts, the yen ended the day at 149.37, down nearly 1.1% against the greenback.
Concerns and Strong Demand
Market observers expressed concern over the price action, suggesting strong demand to buy into dollar/yen dips. The MOF may find the situation worrisome, especially considering the opportune timing for intervention with falling U.S. yields.
Record Intervention and Suspicions
Estimates suggest that Japan spent a record amount, around 5.4 trillion-5.5 trillion yen ($36.16 billion-$36.83 billion), in last Friday’s yen-buying intervention. Traders suspect the BOJ has intervened multiple times in the past month to stabilize the currency, which has seen a significant decline of 22% against the dollar this year.
BOJ’s Efforts in Bond Markets
To maintain ultra-low borrowing costs, the Japanese government and the BOJ have also intervened in bond markets to control yields. Concerns arise over the sustainability of the current framework, as the BOJ had to step in with special bond buying operations regularly to manage government bond rates.
Dollar’s Gains and Sterling’s See-Saw
The U.S. dollar made gains against major currencies, with the euro down 0.4% at $0.9823. Meanwhile, sterling experienced fluctuations due to former prime minister Boris Johnson dropping out of the Tory leadership contest. Rishi Sunak has emerged as the frontrunner to become the next British prime minister.
Sunak’s Potential Premiership
With Rishi Sunak as a potential prime minister and a focus on restoring the UK’s fiscal credibility, sterling’s price action assumes the advent of a Sunak/Hunt ticket as PM/Chancellor. The challenges facing the new team are expected to be greater than those earlier this summer, potentially limiting international investors’ willingness to drive the currency above the 1.15 level.
However, the exceptionally elevated FX volatility suggests that large swings in the market cannot be ruled out.