Yesterday’s release of the US Consumer Price Index (CPI) proved to be more eventful than expected. The year-over-year CPI rose by +3.0%, and the core CPI increased by +3.3%, indicating a sharper-than-expected slowdown in inflation. This led to a rapid decline in US bond yields and a strong wave of USD selling. Following the initial reaction, the USD/JPY continued to fall sharply, accompanied by a surge in the yen across cross-currency pairs.
There is speculation in the market that the Japanese government and the Bank of Japan (BOJ) may have intervened by buying yen during the CPI release. Even in the Tokyo market today, movements towards yen appreciation have been observed when the USD/JPY touches the 159 yen range. Reports suggest that in addition to actual intervention, there have been rate checks involving EUR/JPY and other pairs.
Finance Minister Kanda has not commented on whether intervention occurred. However, by referencing US Treasury Secretary Yellen’s remark that “intervention should be rare,” he hinted at close communication between US and Japanese authorities. It is possible to infer whether intervention took place by examining changes in the BOJ’s current account deposit factors and the difference between expected and actual financial adjustments by money market companies. Keeping an eye on news reports is advisable.
Assuming intervention did occur, it might signal that authorities could not tolerate the yen’s depreciation beyond the 160 yen level. With the adverse effects of excessive yen depreciation on the Japanese economy being noted, the timing of early US rate cut expectations seems to suggest an attempt to reverse the USD/JPY trend, even if only temporarily.
This highlights the importance of today’s US Producer Price Index (PPI) results. If a strong inflation report follows the yen intervention, the 160 yen level may come into play again. Conversely, if weak inflation data persists, the market could move towards yen appreciation and USD depreciation without further intervention costs. The PPI results will be awaited keenly, with the release scheduled .
Other economic indicators set to be released in the overseas market include the University of Michigan Consumer Sentiment Index (preliminary) for July and Canadian Building Permits for May. The Michigan sentiment index is expected to improve to 68.5 from the previous 68.2.
Trading Strategy
Although the yen’s buying momentum was strong yesterday, it could have been a reversal of excessive yen depreciation, making it difficult to make a definitive call. There is a high possibility that the BOJ intervened.
I had planned to buy USD/JPY following the BOJ’s intervention, but given the immediate aftermath of the CPI release, I did not enter a position. With the US CPI showing a decline, it has become less appealing to buy USD/JPY.
Based on the US CPI results, I will continue to target USD selling.
