Japanese yen surges, ringing intervention alarm bells

LONDON (Reuters) -The Japanese yen surged nearly 3% on Thursday in its biggest daily rise since late 2022, a move that local media attributed to a round of official buying to prop up a currency that has languished at 38-year lows.

The dollar dropped to as low as 157.40, straight after data showed U.S.consumer inflation cooled more than expected in June.

Yet the scale and speed of the move put traders on alert to the possibility of Japanese intervention. Authorities stepped in as recently as early May to bolster the yen.

Local Japanese television station Asahi, citing government sources, said officials intervened in the currency market.

Domestic news service Jiji cited top currency diplomat Masato Kanda as saying he could not comment on whether or not there was an intervention, but that recent moves in the yen were "not in line with fundamentals".

Japan's Ministry of Finance, which has made it standard practice not to comment on activity in the FX market, and the New York Federal Reserve were not immediately available to requests for comment from Reuters.

Several currency analysts and traders initially said they thought the yen surge was probably triggered by options-related activity following the consumer price report that bolstered the Federal Reserve's case to cut rates as early as September.

However, as the yen strengthened, others said the move bore the hallmarks of official buying.

"The MOF won't confirm this for some time but the extent of the move gives a strong impression that it has been active and taken advantage of the post U.S. CPI data to take action," said Chris Scicluna, head of economic research at Daiwa Capital Markets in London.

Investors have relentlessly sold the yen for months, given how much lower interest rates are in Japan than anywhere else, which has created a build-up of bearish positions in the Japanese currency that some will have been forced to unwind.

The dollar was last trading at 158.70 yen, down 1.8% on the day, its lowest since mid-June.

The gap between U.S. and Japanese rates has created a highly lucrative trading opportunity, in which traders borrow the yen at low rates to invest in dollar-priced assets for a higher return, known a carry trade.

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Thursday's U.S. inflation data raised the chances of that gap shrinking more quickly.

The futures market shows traders now fully expect a September rate cut from the Fed and roughly 60 basis points of easing by year-end, compared with around 45 bps earlier this week, which undermines the dollar.

"The thing is the market position is so extended that it can feed on itself very, very easily," James Malcolm, head of FX strategy at UBS and veteran Japan watcher, said.

"Regardless of whether you think it should be stabilising, if dollar-yen is dropping and you're long, you have to get out… that’s the definition of a classic carry unwind."

The yen strengthened across the board, leaving the euro down 2% at 171.60 yen, while sterling fell 1.4% to 204.72 yen. The Australian dollar, which fell to 107.50 yen.

The most recent weekly data from the U.S. regulator showed speculators are sitting on bets against the yen worth $14.26 billion, not far from April's 6-1/2 year high, according to LSEG data.

Theoretically, the larger a bearish position, the greater the scope for investors to reverse course, which in this case, would boost the yen against the dollar.

(Reporting by Dhara Ranasinghe, Alun John, Harry Robertson, Amanda Cooper and Alden Bentley; Editing by Dhara Ranasinghe and Arun Koyyur)