Yen Market Rally

Japanese yen rises sharply against the dollar as rate hike expectations grow.

The Japanese yen is on the rise six weeks after hitting a four-decade low against the dollar. Factors such as the Bank of Japan expected to raise its key rate by 25 basis points (bps) this month, and the market is also considering a 50-basis-point hike or a series of rapid increases in the months ahead. This shift in market psychology is backed up by money flows, which have shifted from bearish to bullish since the start of August. Interbank flow data shows leveraged funds, banks, and real-money investors all net buying yen this week. The yen is set for a 2.3% surge against the greenback this week, the most since a rare joint U.S. and Japan intervention in July to lift the yen. The risk of a rapid unwinding of yen-based carry trades is also rising, similar to what was seen in 1998 when the collapse of Long-Term Capital Management forced banks and hedge funds to rapidly deleverage.

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