Yen #JPY Traders Brace for Major Hurdles Ahead of Critical #BOJ Meeting Amid Suspected Interventions #USDJPY #BOJ #Forex

Yen #JPY traders, once again experiencing the impact of suspected market interventions, are bracing for several hurdles ahead of the critical Bank of Japan (#BOJ) meeting at the end of the month.

Despite the temporary lift from the suspected intervention and a favorable drop in #US bond yields that pressured the broader dollar #USD, the yen #JPY only managed to gain less than 2% against the greenback last week. This modest gain indicates that the yen #JPY will require additional support from Japanese #JAP authorities to decisively reverse its downward trend.

The yen #JPY has depreciated by 11% this year, exacerbating Japan's inflationary pressures and maintaining the possibility that the #BOJ might raise interest rates on July 31 for only the second time since 2007. Traders are particularly focused on the upcoming data release on Friday 19th, which is expected to show that Japan’s inflation rate increased to 2.9% in June, according to a Bloomberg survey of economists. This figure significantly exceeds the #BOJ’s 2% target.

A head of FX strategy at Nomura Securities Co. in Tokyo, stated, "If the yen #JPY continues to trade weakly leading up to the July meeting, the bank #BOJ might have to consider an early rate hike, even as it deliberates on the pace of reducing Japanese government bond purchases." Nomura noted that the suspected intervention places additional pressure on the #BOJ to tighten its policy accordingly. According to swap markets, the probability of the #BOJ raising rates by 10 basis points has decreased from 59% to 51% following the yen’s #JPY rise on Thursday 11th. This leaves room for the yen #JPY to rally should the central bank #BPJ proceed with an increase, although such an advance may still be insufficient to break the prevailing bearish trend.

Some analysts suggest that if the #BOJ raises rates while also announcing a reduction in bond purchases, it could be perceived as a reaction to currency volatility rather than a move to stabilize prices. The strategist believes that a 15 basis point hike by the central bank #BOJ might lead to a 2-3 yen #JPY gain for Japan's currency, but he doubts that a rate rise alone would be enough to change the direction of the FX pair. Swaps currently indicate only about a 35% chance of an increase of that magnitude.

Barclays Bank PLC also anticipates that the #BOJ will raise its target to 0.25% this month but expects only a limited impact on the currency. Barclays forecasts that the dollar-yen #USDJPY rate will end the quarter at 160, with the currency trading around 158 per dollar on Friday 12th.

A Bloomberg analysis of central bank accounts suggests that Japan #JAP likely spent approximately #JPY 3.5 trillion (#USD 22 billion) on Thursday 11th to support the yen #JPY, marking what seems to be the third intervention this year.

"While yen #JPY weakness increases expectations of a #BOJ hike this month, we believe domestic-overseas yield differentials are too wide for a sustained reversal," said an head of FX and EM macro strategy for Asia at Barclays, based in Singapore.

Yen #JPY bulls might therefore be hoping that the upcoming #US ?retail sales data, scheduled for July 16th, indicate a slowdown in the world's largest economy. This could put downward pressure on #Treasury yields, thereby influencing the dollar-yen rate #USDJPY. However, if the data is strong, the focus will quickly shift back to the #BOJ’s policy decision.

"If there’s no change in rates, then we might see renewed yen #JPY selling," commented an head of FX strategy at National Australia Bank Ltd. in Sydney.

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