The Yen is capitalising on the Euro’s weakness

The US dollar continues to be in demand thanks to a strong economy, the attractiveness of its assets and the Fed’s intention to continue its cycle of rate rises. The minutes of the September FOMC meeting noted that a rise in the federal funds rate would be appropriate towards the end of the year. The futures market puts the probability of a rate rise in October at 19% and in December at 86%.

For the Bank of Japan, these figures stand at 5% and 70%. It is most likely that both central banks will postpone rate rises until the end of the year, keeping the bond yield spread wide and supporting USDJPY appreciation. This is all the more so given that US participation in coordinated interventions has been minimal. The Fed noted that it did not use its own funds to buy the yen, but acted merely as an agent for the Treasury. Earlier, US Treasury Secretary Scott Bessent had spoken of his department’s nominal participation in foreign exchange market interventions.

It appears that Washington and Tokyo have made a mountain out of a molehill, scaring off speculators with talk of coordinated currency intervention. In reality, the main burden fell on Japan, which spent around $97.5 billion on USDJPY sales in the month leading up to 26 August. If so, the return of hedge funds to net short positions in the yen after a two-week hiatus appears justified. Divergence in economic growth and the faster rise in US bond yields will contribute to a further strengthening of the dollar.

Pressure on the yen is also being exerted by Brent’s reluctance to fall below $100 per barrel. According to a Reuters survey, it is precisely the volatility of the oil market that poses the main threat to Japanese companies. This view was shared by 37% of experts, while 21% cited currency fluctuations and 19% pointed to higher BoJ interest rates. 

The yen is being supported by a shift in investors’ views regarding the funding currency for carry trades. The euro is increasingly being used for this purpose. The French fiscal crisis is leading to capital outflows and is sending the single currency reeling. EURJPY rates have plummeted to their lowest levels since November. Calls from French politicians for the ECB to cut interest rates are undermining confidence in the euro, reminiscent of Donald Trump’s previous pressure on Powell.

Summary: The dollar is strengthening against the yen thanks to a strong US economy and a wide yield spread, whilst the yen is gaining ground against the euro amid the French fiscal crisis.