(Bloomberg) -- The yen declined, trimming Thursday’s rally, as focus shifted from speculation of a near-term policy shift by the Bank of Japan to strong US jobs data.
The currency fell as much as 0.8% to 145.21 per dollar after data showed the US economy created more jobs than expected last month, leading traders to scale back bets on how much the Federal Reserve will cut rates next year. Treasury yields and the dollar climbed.
The weakness in the yen comes after the currency jumped almost 4% in New York trading on Thursday, following comments from BOJ Governor Kazuo Ueda and remarks from one of his deputies that suggested an upcoming policy tweak.
The outsized moves may have been amplified by speculators closing bearish wagers on the yen, after leveraged funds boosted these to the highest level in more than a year last week. There were also suggestions that a lack of liquidity and algorithmic trading exacerbated the spike.
“Yen-short positions may have been liquidated considerably,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities Co., who added that stop-loss trades were also likely triggered.
“The markets will probably continue to be volatile with nervousness until Governor Ueda’s real intention is revealed on Dec. 19, the monetary policy decision date,” said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank Ltd.
Economists increasingly expect the central bank to achieve its inflation target, while remaining less aggressive than traders in expectations for how soon the BOJ will move. A growing majority of economists forecast that the negative rate regime will end by April, according to a Bloomberg survey.
They are focused on whether Ueda gives any indication of changes to come in a policy statement or at his press conference following the December decision, rather any outright change in settings that soon.
Read more: Two-Thirds of BOJ Watchers Expect End of Negative Rate by April
“The odds of tightening administered rates on Dec. 19 are still a bit of a long shot,” said Bipan Rai, CIBC’s global head of foreign-exchange strategy in Toronto. “In conjunction with greater certainty that the Federal Reserve is done with rate hikes, the risk-reward of USD/JPY longs has shifted materially.”
Leveraged funds boosted their net-short position in the yen to 65,611 contracts in the week ending Nov. 28, the most since April 2022, according to Commodity Futures Trading Commission data.
The yen’s rally Thursday was the biggest since the BOJ blindsided investors in December last year after then Governor Haruhiko Kuroda doubled the cap on 10-year yields, sparking bets on policy normalization.
Ueda, who took the helm in April, has maintained cautious approach and gradually widened the yield-curve control this year. He’s kept ultra-loose monetary in place at a time when other major central banks were increasing interest rates to contain global price growth.
BOJ officials have said the bank is not confident enough yet about attaining the price goal of stable inflation at 2% accompanied by wage growth.
Data released Friday showed labor cash earnings increased more than expected in October, up 1.5% on year compared with the median estimate of 1% in a Bloomberg survey of economists. Still, real cash earnings dropped for 19th straight month.
The yen is still down about 9% against the greenback this year, the second worst performance among G-10 peers.
“Even after a monetary policy shift by the BOJ, the yield gap with overseas nations will remain, so it’s possible investors will re-enter the carry trade,” said Wako Ogawa, director of foreign-exchange sales at Deutsche Securities Inc. in Tokyo “However, it’s hard to take such positions while there’s no clear signal on when the policy will be adjusted.”
Ogawa expects the yen will probably see more appreciation pressure toward the BOJ meetings this month and in January.
--With assistance from Masahiro Hidaka, Anya Andrianova, Ruth Carson, Winnie Hsu, Saburo Funabiki and Aline Oyamada.
(Updates throughout with yen’s moves after US jobs report.)
©2023 Bloomberg L.P.