Shorts retreat, Yen continues to rise! Yen breaks through key levels against the US Dollar

On July 24th, the Japanese yen to US dollar exchange rate broke through a key level, triggering global unwinding of carry trades and causing currencies such as the Mexican peso, Australian dollar, and New Zealand dollar against the yen to fall.

The USD/JPY exchange rate fell below the 100-day moving average for the first time since mid-March, and also breached the psychological level of 155, with technical indicators suggesting that this downward trend may continue. As a result, the Australian dollar, New Zealand dollar, and Mexican peso against the yen all fell by about 1%.

Since hitting a near 40-year low on July 3rd, the yen has rebounded by over 4.5%. Speculations of multiple rounds of intervention in the currency market by Japanese authorities on July 11th and 12th, along with comments from US Republican presidential candidate Trump favoring a weaker dollar, as well as calls from prominent figures in Japanese politics for the Bank of Japan to raise interest rates, have all fueled the yen's rise.

Japan's ultra-low interest rate policy in recent years has made the yen a favored source of funding for carry traders. However, with expectations of further rate hikes in Japan and possible additional intervention in the currency market by authorities, carry trades borrowing yen to invest in higher-yielding currencies are gradually unwinding.

Chad Frantovich, Chief FX Strategist at West Pacific Bank, noted: "The unwinding of carry trades this week is more pronounced, reflecting a concentration of short yen positions, and the intervention measures by the Japanese Ministry of Finance require stronger support for the yen. The economic risks brought by the continued weakening of the yen are becoming increasingly outspoken in Japanese political circles."

Toshimitsu Motegi, Secretary-General of the Liberal Democratic Party, emphasized this week that the Bank of Japan should clearly demonstrate its commitment to normalizing its monetary policy, including gradually raising interest rates. He added, "Excessive depreciation of the yen is clearly detrimental to the Japanese economy."

Raising interest rates by the Bank of Japan is also seen as a key to ending the yen's weakness. Overnight index swaps suggest a 33% chance of a 15 basis point rate hike at the Bank of Japan's policy meeting at the end of this month. Furthermore, a media survey showed that only about 30% of BOJ watchers expect a rate hike at the end of this month, but over 90% of respondents believe there is a risk of a rate hike