USDJPY Testing the 160.000 Boundaries Again: Will BoJ Intervention Drag USDJPY Down?

The Japanese yen has been steadily losing ground in Asian trading, with USD/JPY rising above 159.00. This brings it close to its highest point of the year, 160.17, seen back in late April. Despite efforts by Japan to stabilize the yen in April and May, the currency has resumed its decline. The gap in yield between US and Japanese government bonds, which peaked at about 4.75% in April, has narrowed by 30 basis points since then. However, this decrease hasn't been enough to counteract the yen's fall, as the spreads remain historically wide.

USDJPY Daily Chart 

 Source: Finlogix Charts This weakening yen puts pressure on Japan's Ministry of Finance and the Bank of Japan. If USD/JPY surpasses 160.00 and the yen's decline speeds up, the Ministry of Finance might intervene again. At the same time, the Bank of Japan may need to speed up its plans for policy adjustments, possibly raising rates by 0.15% at its next meeting and reducing purchases of Japanese Government Bonds.

In the US Treasury's semi-annual report to Congress on economic and foreign exchange policies, Japan has been added to the monitoring list for foreign exchange practices but hasn't been labelled a currency manipulator. The report stresses that interventions should occur only under exceptional circumstances and acknowledges Japan's transparency in its foreign exchange operations. The significant depreciation of the yen aligns with the wide interest rate differences between Japan and the US, reflecting their differing monetary policies.

The correlation between USD/JPY and USD/CNY remains strong, with both the yen and the Chinese renminbi weakening. USD/CNY reached a new high for the year at 7.2613, nearing last year's peaks of 7.3000 to 7.3500. The People's Bank of China has been setting higher daily rates, indicating a tolerance for a weaker currency. This trend is expected to continue, especially as trade tensions between the US and China may escalate during the US election period.

China remains on the US Treasury's monitoring list due to its lack of transparency in foreign exchange interventions and its significant trade imbalance with the US. The Treasury report suggests that Asian currencies, including the yen and the renminbi, may face further weakness in the near term.

The strength of the Swiss franc recently prompted the Swiss National Bank (SNB) to cut rates. Updated inflation forecasts from the SNB suggest a potential overestimation of inflation risks. The latest projections indicate that annual inflation could drop to 1.1% by Q2 2025, earlier than previously expected, and to 1.0% by Q1 2027.

SNB President Thomas Jordan cited political uncertainties in Europe as a factor behind the franc's strength. The SNB is committed to using monetary policy to maintain price stability and is prepared to intervene in the foreign exchange market if necessary. If political risks in the eurozone diminish, the franc could appreciate significantly, prompting further SNB intervention to prevent excessive strength.

The recent SNB rate cut had a limited impact on the franc, which gained 0.4% against the euro following the decision. Political uncertainties in Europe, particularly potential outcomes from snap elections, could continue to influence the franc's direction and may necessitate further SNB actions to prevent appreciation.

In conclusion, the currency markets are witnessing significant movements influenced by policy decisions and geopolitical factors. The yen's ongoing weakness, the US Treasury's oversight activities, and the strength of the Swiss franc underscore the intricate interplay between economic policies and global relations. As these dynamics unfold, market participants will closely monitor central bank actions and political developments to gauge their potential effects on currency values.

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