Yen's weakness shows market isn't done pushing
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Japan's currency dropped Monday, resuming a selloff momentarily halted by a coordinated intervention with the U.S. late last month.
Why it matters: The decline suggests that the U.S. Treasury Department and Japan's Ministry of Finance have further work to do to put a floor under the exchange rate.
Catch up quick: Late last month, U.S. and Japanese authorities intervened in the currency markets to buy yen and push up its value.
- In the year prior to the intervention, the yen declined in value by roughly 10%, as investors moved money away from Japan's relatively slow-growing, low-interest-rate economy to markets with higher potential returns.
The intrigue: Analysts believe that U.S. participation was based on the fact that Japan — the largest foreign owner of U.S. government bonds — was selling Treasurys to generate dollars needed to buy yen as part of its own market intervention.
- All else being equal, Treasury sales by Japan push prices of those U.S. government bonds down, pushing yields — the basis for U.S. borrowing costs — higher.
- Bond yields, so influential to the setting of interest rates that they're referred to as "rates" on Wall Street, move in the opposite direction of prices.
- And higher interest rates can act as a headwind for U.S. economic growth.
Zoom in: The so-called joint yen-tervention worked — at least at first. The yen jumped against the U.S. dollar.
- Subsequent data showed hedge funds that had been betting against the yen abandoned positions in response to the move.
Yes, but: The return of selling pressure could mean more action is needed from the U.S. to show that it has the resolve to pour more resources into the markets to stabilize another country's currency.
- "If it becomes clear that the Treasury is trying to limit its participation and exposure, the market may regain courage to short JPY again," wrote Steven Englander, a currency market analyst with Standard Chartered Bank, using the abbreviation for the Japanese yen.
The bottom line: That may already be happening.
