Betting on the dollar against the yen is a “treacherous path” with BC interventions By Investing.com

Investing.com — The bet on the dollar against the yen has been one of the most prominent in the foreign exchange market, dominating flows recently. However, this strategy can be a “treacherous path”, in Macquarie’s words. The institution warns that Japan is likely to continue to intervene in the market, following last week’s action that appreciated the Japanese currency, especially with new expectations of cuts in US interest rates.

“Operate purchased in [dólar contra iene] is now a risky move in a tactical strategy,” Macquarie said in a Monday statement. The warning comes with the possibility of further interventions by Japan’s Ministry of Finance, especially if there are fluctuations in yield differentials between the U.S. and Japan, driven by the latest American employment report.

The April jobs report (), which came in below expectations on Friday, has reignited the possibility of an earlier-than-expected rate cut, with markets now anticipating a reduction as early as September rather than December . The data indicated not only lower-than-expected job creation, but also a slowdown in wage growth.

According to Macquarie, this reflects a more stable balance between labor supply and demand, a view that had previously been suggested by the president of , Jerome Powell, when mentioning that the labor market is not as tight as before.

With the increase in labor supply, boosted by immigration, the focus should shift from job growth to turnover and wage indicators as metrics to evaluate the Fed’s future decisions, Macquarie explained.

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This new paradigm in the labor market contributed to sustaining payrolls and making the market more competitive, which helped control wage increases and turnover, refuting the idea of ​​a continued tightening in the labor market.

“We are certain that the job market is less heated than it was a year ago, but this is more due to turnover and salary data than to job growth numbers,” adds Macquarie.

Expectations of further signs of a cooling labor market could raise the odds of an interest rate cut and prompt bets that U.S. Treasury yields have peaked, paving the way for further interventions by Japan to strengthen the yen. .

Recently, yen short sellers have not shown much of a reaction to Japanese intervention in the foreign exchange market, despite expectations that rate hikes rather than interventions would be needed to stem the yen’s decline.

There was only a “small reduction” in speculative yen short positions, according to CFTC reports from last week, indicating that holders of long USD/JPY positions “do not appear to have been greatly deterred by the foreign exchange interventions of the Ministry of Finance and the Bank of Japan,” Macquarie reported.

However, the risk of further interventions could destabilize dollar investors against the yen, making the return on this bet even less attractive. “We suspect more speculators will need to unwind their long USD/JPY positions at the end of last week and this week,” Macquarie concluded.

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