MUFG: The JPY - FJElite

The yen has continued to weaken overnight giving back more of the intervention driven gains. It has resulted in USD/JPY moving back closer to the 160.00-level ahead of the release of the US CPI report later today. The price action clearly highlights that market participants remain unconvinced that intervention will prove successful in supporting a stronger yen without a change in fundamentals. The release of the latest CFTC report at the end of last week did show that that intervention triggered a sharp squeeze of speculative short yen positions. Short yen positions held by leveraged funds fell sharpy by around 40% in the week ending 4^ August to 60,825 contracts. If there is no change in fundamentals, speculators will be encouraged to rebuild short yen positions at a time when stable financial market conditions remain supportive for carry trades.

One potential change in fundamentals is that it appears more likely now that the BoJ will speed up the pace of rate hikes. Recent hawkish rhetoric from the BoJ and joint intervention alongside the US to support the yen have given market participants more confidence that the BoJ will hike rates sooner. The Japanese rate market has moved more in line with our view to price in around 19bps of tightening from the BoJ by September. However, the hawkish repricing of the BoJ rate hike expectations has so far failed to prevent the yen from re-weakening.