JPY and Yuan

JPY… On September 22, Japan made its first yen buying, dollar selling intervention after nearly 24 years. Finance Minister Shunichi Suzuki immediately announced the move at a press conference, but the operation did not prevent the yen from depreciating further.

Japan spent 6,349.9 billion yen on foreign exchange market interventions last month, hitting a monthly record for the country’s yen buying operations, according to a report by Japan’s Ministry of Finance. The previous high was 2.838.2 billion yen recorded in the previous month. The most recent report covered the period from September 29 to Thursday. As a result, the total amount of yen buying interventions to halt the currency’s continued downward march reached nearly 9.2 trillion yen.

Other moments of high volatility, including a sharp move on October 24, prompted traders to speculate on how often officials operate in the markets and how long they can continue to support the currency.

Suspicious Movements… Japan prefers to remain silent on currency interventions since September 22… Source: Bloomberg

“There still has to be more than 10 trillion yen in cash left in Japan, so major interventions at the level we saw in September and October could happen maybe three to five times more,” said economist Atsushi Takeda of the Itochu Research Institute.

According to the finance ministry, Japan had foreign exchange reserves worth about $1.24 trillion as of the end of September. Among the most liquid foreign reserve assets are $135.5 billion in deposits with foreign central banks and the Bank for International Settlements.

“One thing to watch out for is the US currency manipulation report,” Takeda said, marking the intervention of more than 2% of gross domestic product among its criteria: “For Japan, that’s about 11 trillion yen, so if that’s your cap, in Japan maybe 2 trillion yen more left.”

The yen is expected to remain under downward pressure against the dollar as the interest rate gap between the US and Japan continues to widen. The Fed posted another big increase this week after the Bank of Japan took a tough stance on Friday. Going forward, however, Itochu’s Takeda said signs the Fed is approaching a top in rate hikes will try to ease the pressure on the yen.

Yuan… Guan Tao, former director of the international payments department of the State Foreign Exchange Administration (SAFE), said in an interview with Bloomberg that the fluctuations in the currency did not result in an economic shock or inflation, the market is still in order and the financial stability is not deteriorated. This prevented the People’s Bank of China (PBOC) from engaging in large-scale monetary intervention unlike its Asian neighbor, adding that volatility is “affordable.” However, Guan said, “If some speculators go too far, the People’s Bank of China must be stronger than the Bank of Japan (BOJ) to intervene in the foreign exchange market.”

The onshore yuan slumped to a 15-year low against the US dollar, days after its biggest single-day gain in two years and implied volatility spiked. He doesn’t rule out that China can use its foreign exchange reserves to avoid excesses in speculative bets on a weaker yuan: “The PBOC is more effective than the BOJ given the yuan’s thinner trading volume, China’s trade surplus, and its larger foreign exchange reserves,” Tao said. Guan said the policy goal of the yuan administration in the long run should be to keep the exchange rate flexible, adding that this is the key to maintaining monetary policy independence and reducing reliance on intervention.

A separate study showed that a weakening yuan is not necessarily bad for local firms. Onshore listed firms posted a net profit of 30.7 billion yuan (US$4.2 billion) in currency conversion in the first half of the year, when the yuan lost nearly 5%. This compares to a net loss of 3.3 billion yuan last year, where the yuan gained about 1%.

The onshore yuan reversed previous losses in spot trading and advanced to 7.2577 before ending the local session at 7.2719, up 0.46% from the previous night’s close at 7.3050. Earlier in the session, the PBOC set the midpoint rate at 7.2081 per US dollar, the lowest since January 24, 2008 and 0.43% weaker than the previous 7.1768 correction. Currency traders took the break of the key 7.2 per dollar level in central bank pegging as a sign that officials were happy with further weakness. As a result, the onshore yuan opened at 7,3201 per US dollar and quickly reached 7,3280, the lowest level since December 26, 2007.

However, aggressive monetary tightening by the US Federal Reserve has supported US dollar and US yields in recent months, and investors are now weighing the possibility of a less aggressive tightening.

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