AWARDS
MUFG: The Yen Elite -
The yen has so far failed to benefit from the ongoing decline in energy prices, with USD/JPY continuing to trade above 160.00 ahead of this week's BoJ monetary policy meeting. Prior to the Middle East conflict, USD/JPY was trading lower, closer to 156.00. The agreement between the United States and Iran, through lower energy prices, could help dampen the yen sell-off. The latest IMM report revealed that leveraged funds have significantly increased their short positions on the yen since the conflict began. Short yen positions increased for the fifth consecutive week through June 9 and have nearly quadrupled since late February, reaching their highest level since early July 2024. This was followed by a sharp unwinding of yen-financed carry trades in the summer of 2024, after the Bank of Japan raised rates in July 2024 and the Fed cut them in September.
The Bank of Japan (BoJ) is expected to raise rates again this week, but a further Fed rate cut appears unlikely at least until the end of the year. Japanese media last week set the stage for a 25 basis point rate hike by the Bank of Japan, indicating that the Bank of Japan is considering suspending its quantitative easing (QE) reduction starting in fiscal 2027. A 25 basis point hike is already fully priced into the market, so it is unlikely to trigger a reversal of the yen's weakening trend on its own, thus encouraging a further increase in yen short positions, as has happened recently. The updated rate guidance could destabilize the situation, either by maintaining a path of further gradual tightening or by predicting another rate hike by the end of the year. A potential source of market volatility will be the press conference, as Deputy Governor Uchida will replace Governor Ueda, who is absent due to illness. If the yen remains weak, pressure on Japan to intervene again to provide support will increase. Intervention could prove more effective if energy prices continue to decline and expectations of a Fed rate hike are tempered.
