Market Brief: Yen Rollercoaster Accelerates

The Japanese yen is stabilising after an extraordinarily-turbulent session. With markets closed for the Golden Week holiday, the exchange rate briefly crashed through the 160-per-dollar threshold for the first time since 1990, and then reversed almost five big figures higher when rumours of central bank intervention hit the wires early this morning - generating a total intra-day move that was the widest since December 2022, and among the top 20 yen-dollar trading ranges in modern history.

Official confirmation hasn’t yet been provided, and evidence of the traditional "rate checking" activity from the Bank of Japan is lacking thus far, but intervention seems eminently plausible. Last night’s volatility comes after the central bank opted not to adjust its asset purchase volumes in last week’s decision, keeping rate differentials at spectacularly-wide levels, and leaving policymakers with few options to arrest the currency’s decline. Last night’s break through the 160 threshold clearly amounted to the sort of “disorderly” move that the Ministry of Finance has previously proven willing to tackle, and algo-driven selling might have continued amid holiday-thinned trading conditions. Vice Minister of Finance for International Affairs Masato Kanda said, “I have nothing to say about whether or not Japan has intervened in the market,” but “It is difficult to ignore the bad effects that these violent and abnormal movements will cause for the nation’s economy. So we will continue to take appropriate measures as necessary.”

In broader currency markets, the dollar’s relentless ascent appears to be slowing. Although the yen achieved the biggest gains overnight, the British pound, euro, Canadian dollar, and Mexican peso are all advancing off the lows hit late last week.

To summarise last week’s developments: Treasury yields and the greenback spiked higher on Thursday when the Bureau of Economic Analysis reported slower growth and a faster-than-anticipated increase in the Federal Reserve’s preferred inflation benchmark in the first quarter, with the core personal consumption expenditures index climbing 3.7 percent year-over-year, topping the 3.4 percent consensus forecast. When the March print met expectations on Friday, yields and the dollar backtracked, and are now retreating ahead of Wednesday’s central bank decision.

The net non-commercial futures bet on the greenback has extended to a five-year high, with market pundits and economists nearly united in expecting further strength. We try to avoid being reflexively contrarian, but sustained surges in bullishness - or bearishness - have historically preceded turning points in the dollar. Momentum might continue for a few weeks yet - speculative narratives are rarely short-lived - but if US economic data slow in the months ahead and Fed officials maintain their bias toward cutting rates, the dollar could easily decline. Either way, the sudden tendency toward placing big punts on currencies is likely to translate into higher levels of volatility across markets.

Today’s economic calendar is relatively light. This afternoon’s Quarterly Refunding Announcement - which sets out the Treasury department’s financing estimates for the three months ahead - is unlikely to rival the drama associated with last summer’s events, when a surprise increase in long-dated issuance sent yields spiralling higher.

Tomorrow morning could be more interesting. The euro area will publish its first estimates for first-quarter gross domestic product and April consumer prices, with the data expected to show a modest acceleration in growth, paired with a slight easing in core inflation. Surprises - particularly to the upside - could see odds on rate cuts in the latter half of the year pulled back a bit, although a move at the June meeting looks effectively written in stone. The Fed’s favourite measure of labour market pressures might show signs of accelerating in the first three months of the year. And Canada’s gross domestic product report could also prove market-moving, with the preliminary March estimate potentially helping debunk - or validate - hopes for a first-quarter rebound in economic activity.

Economic Calendar