Global market "eye of the storm", next week is crucial for the rise of the Japanese Yen

In recent weeks, investors have been rushing to buy the Japanese yen, betting on the Bank of Japan to raise interest rates at its policy meeting next Wednesday. However, this bet now appears to be less certain.

The swap market shows that the probability of the Bank of Japan raising rates by 15 basis points at the end of the policy meeting on July 31 is 41%, less than half. A recent survey by a media outlet shows that only 30% of Bank of Japan watchers predict a rate hike.

Previously, influenced by expectations of a rate hike, the yen has been soaring since July 11, prompting Japanese authorities to intervene in the foreign exchange market. The yen has gained even more strength, with the increase reaching 5% so far. Following stronger-than-expected U.S. economic growth data overnight, the yen has retraced some of its gains.

Analysis suggests that if the rate hike falls through, especially if the central bank does not reduce its bond-buying program as expected, Japanese yen bulls are likely to be disappointed.

"The yen's rally has been too crazy," said Nick Twidale of ATFX Global Markets, who has been trading the yen for 25 years. "The Bank of Japan may disappoint and not play its role in tightening policy."

Twidale also mentioned that if the Bank of Japan does not meet market expectations, arbitrage trades shorting the yen "may come back into play".

It is worth noting that the day after the Bank of Japan announces its rate decision, the Federal Reserve will follow with its July rate decision. It is widely expected that the Fed will maintain the status quo, but any indication of weakening expectations of a rate cut will further pressure the yen.

BlackRock and former Bank of Japan officials have predicted that the Bank of Japan will keep rates unchanged for a longer period, with a series of economic data such as the July manufacturing PMI (slipping below the boom-bust line) confirming this view. Sources familiar with the matter revealed to the media that Bank of Japan officials believe that weak consumer spending will make their decision on whether to raise rates at the next week's policy meeting more complicated.

"If the Bank of Japan takes no action, the USD/JPY exchange rate could soar again," said Amir Anvarzadeh, a strategist at Asymmetry Advisors who has been tracking the Japanese market for over 30 years