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Analysis-Traders prep for another round of yen whack-a-mole

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Analysis-Traders prep for another round of yen whack-a-mole

By Amanda Cooper and Dhara Ranasinghe

LONDON (Reuters) – Japan’s attempts to shore up its currency are putting trading desks across the globe on high alert and dealers are taking no chances ahead of a long weekend in London and Tokyo that might offer authorities another opportunity to bolster the frail yen.

The Japanese currency, which is around its weakest since 1990, has witnessed its biggest weekly price swing since 2022, when the Bank of Japan bought the yen for the first time since 1998.

Traders suspect the authorities stepped in on at least two days this week and data from the BOJ suggests Japanese officials may have spent almost $60 billion in doing so — roughly what they spent on three bouts of intervention over September and October 2022.

The blueprint for what they believe is intervention now includes operating in a near-vacuum of market liquidity, and a series of Japanese public holidays plus Monday’s holiday in the UK – the world’s biggest FX trading centre – could present a possible window.

Monday’s suspected intervention took place on a Japanese holiday and Wednesday’s was late in New York. Currency intervention during quieter periods, can potentially have more impact, giving the BOJ more bang for its buck.

Japanese authorities have repeatedly declined to comment.

“We’re (now) telling clients not to be surprised that these intervention efforts are coming at questionable times, this is multi-pronged and its meant to be opaque, as this is where they are going to have the biggest impact on overall market psychology,” said Simon Harvey, head of FX analysis at Monex Europe, which advises companies and investors on currency management.

Reuters spoke to a number of large investment banks and asset managers in London on their staffing plans for Monday.

At least three said FX trading desks were staffed on public holidays to cover overseas markets but added it was usual to make adjustments if needed.

REASON FOR UNEASE

During Monday’s Japanese holiday, the dollar hit a new 34-year high of 160.245 yen, before getting swatted back to a low of 154.40 by the time Europe opened. Excluding previous rounds of intervention, the dollar has only fallen that sharply on a handful of occasions in recent years.

Late in the U.S. day on Wednesday, the dollar suddenly plunged 1% in five minutes, tumbling another 2% over another half an hour to the day’s low.

Spot yen trading volume on the EBS platform hit $77 billion on Monday, its highest since November 2016, CME Group data shows.

The data also showed volume hit $42 billion on Wednesday and 78% of that was in a one-hour window late in New York.

“The volatility has come in times of illiquidity, causing an increased sense of nervousness ahead of a few holidays between now and Monday,” said one London-based trader, declining to be named.

LOW RIDER

The yen has weakened for over a decade, largely due to how low Japanese interest rates are compared to other large economies including the United States.

In the last three years alone, the yen has lost around 35% of its value against the dollar, boosting Japanese exporters’ competitiveness, but adding a hefty premium to the import bill.

The yawning discount of Japanese rates versus U.S. ones encourages investors to stay positioned against the yen even with the risk of BOJ intervention.

“Because of the wide rate differentials, speculators will still be on the other side of this trade,” said Kaspar Hense, a senior portfolio manager at BlueBay Asset Management.

In fact, in the week ended April 23, speculators held their biggest bearish bet on the yen in seven years in dollar terms, according to the U.S. markets regulator.

Volatility in the yen, as measured by overnight options pricing, has shifted up a gear since the BOJ intervened in September 2022.

Yen volatility has averaged around 9.4% since then, compared with an average of 7.8% over the last 13 years, according to LSEG data.

Central banks and companies dislike currency volatility, as it complicates their risk-management efforts, while traders love how it can juice up their profits.

But extreme volatility, such as that seen on Monday and Wednesday, has high stakes.

“These are moves that typically take weeks, if not months, to play out, compressed into periods of a few minutes,” said James Malcolm, head of FX strategy at UBS.

“People’s year, or careers, are made typically in the case of minutes and not days or months.”

 

(Reporting by Amanda Cooper, Alun John, Dhara Ranasinghe, Naomi Rovnick, Harry Robertson and Danilo Masoni; Editing by Alexandra Hudson)

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