The foreign exchange market is highly sensitive to economic and policy changes, and sudden surges and drops are a common occurrence.
In particular, the Japanese foreign exchange market has recently seen a series of notable events, and I will explain the future outlook amid these turbulent developments.
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[Sharp Rise in USD/JPY and the Bank of Japan’s Monetary Policy]
The USD/JPY exchange rate surged to near last year’s high of 151.72 yen, and it can be attributed largely to the influence of the Bank of Japan (BOJ), Japan’s central bank.
The BOJ decided to further ease its Yield Curve Control (YCC) policy at its monetary policy decision meeting on October 31.
This measure aimed to curb the rise in long-term interest rates and lower the value of the yen. However, the market expected more aggressive measures, and after the monetary policy decision meeting, the yen rapidly depreciated.
The USD/JPY temporarily rose to 151.72 yen, approaching the high of 151.95 yen from last year. The one-day trading range reached 269 pips (151.72 yen – 149.03 yen), highlighting the significant depreciation of the yen.
Due to this rapid price movement, the volatility condition set by Japanese authorities for foreign exchange intervention increased significantly. As a result, the possibility of the BOJ’s intervention to sell dollars in the Tokyo market on November 1 increased rapidly.
[Topic 1: Flexibility in the BOJ’s Monetary Policy]
The Bank of Japan promoted a weaker yen through the flexibility in its monetary policy.
This flexibility demonstrated the BOJ’s proactive stance to the market and had a significant impact on the foreign exchange market.
[Topic 2: Discrepancy between Market Expectations and Actual Measures]
The market expected more aggressive measures, and the actual measures fell short, leading to an accelerated depreciation of the yen after the surge.
[Standby State for Foreign Exchange Intervention]
On the other hand, the market focused on foreign exchange intervention, and while USD/JPY surged on October 31, government announcements suggested the possibility of intervention.
Kanda Masato, the Vice Minister of Finance, declared that foreign exchange intervention is in a “standby” state, capturing the market’s attention.
This statement caused the USD/JPY to fall, increasing the likelihood of government-led foreign exchange intervention.
[Topic 1: Government’s Announcement on Standby for Foreign Exchange Intervention]
The government’s statements had a significant impact on the market, putting the market on alert.
[Topic 2: No Actual Foreign Exchange Intervention]
However, in reality, no foreign exchange intervention took place. Market uncertainty increased, and the government’s statements mitigated the market’s sharp decline.
[Effect of Foreign Exchange Intervention and Market Skepticism]
Market opinions on foreign exchange intervention vary, with some believing in its short-term effectiveness but questioning its sustainability in the medium term.
George Saraveros, Global Head of Foreign Exchange Research at Deutsche Bank, pointed out that the likelihood of the Bank of Japan’s yen-buying intervention being effective is low.
Moreover, the market appears to underestimate the intervention’s effectiveness, with concerns that USD/JPY and the yen crosses may be overbought.
[Topic 1: Divergent Opinions in the Market]
There is a divergence of opinions in the market regarding the effectiveness of foreign exchange intervention, especially in the medium term.
[Topic 2: High Short-Term Effectiveness]
On the other hand, a significant amount of dollar-selling intervention can have extremely high short-term effectiveness.
Amid increased market uncertainty, intervention is expected to contribute to market stability.
[Euro’s Attention and the Potential for Euro Depreciation]
Meanwhile, the euro has drawn market attention, replacing the USD/JPY.
The euro has weakened due to multiple factors, and there is caution about the sharp deceleration of EUR/JPY and EUR/CHF.
[Topic 1: Impact of Israel and Hamas Conflict]
The conflict between Israel and Hamas has exerted pressure on the euro, with geopolitical factors contributing to euro depreciation.
[Topic 2: ECB’s Monetary Policy Changes]
The European Central Bank (ECB) has refrained from raising interest rates since embarking on rate hikes in July 2022, constraining the euro’s upside potential.
[Topic 3: Deterioration of Intra-European Trade Balance]
The intra-European trade balance has worsened, contributing to euro depreciation. Limited returns are expected for EUR/USD, EUR/JPY, and EUR/CHF.
[Conclusion]
In the foreign exchange market, policy and international developments play crucial roles.
Market uncertainty regarding the current situation is high, and the future outlook is subject to fluctuations.
USD/JPY is expected to consolidate in the short term within the range of 148 to 152 yen, with a continued yen depreciation trend in the medium term. On the other hand, the euro may face a high likelihood of depreciating to around 156 yen in EUR/JPY.
Geopolitical events like the Israel and Hamas conflict, changes in monetary policy, and worsening intra-European trade balance are factors constraining the euro’s upside potential, and the market is closely monitoring these developments.
In the foreign exchange market, investors need to adapt to market volatility in response to policy and international changes.
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