The Japanese currency was again subjected to a large-scale sale against the US dollar on Tuesday. The greenback demand jumps sharply after the release of US inflation data for August.
Rocket Takeoff USD
Yesterday, the focus of attention of traders was the release of the US consumer price index for the past month.
Recall that economists expected a decrease in inflationary pressure in annual terms to 8.1% from the previous value of 8.5%.
This assessment had a negative impact on the dollar. Ahead of the release of the data, the US currency showed a fall on almost all fronts.
Many feared that a significant weakening of inflation for the second consecutive month could force the Federal Reserve to slow down the pace of raising interest rates.
However, the forecast did not come true. The consumer price index fell less than expected in August and amounted to 8.3%.
The data shocked the markets and destroyed the illusion that inflation in America had already passed its peak and headed for a steady decline.
It has now become clear that the problem is still very acute. Given the latest data, many analysts do not rule out that the Fed may launch a more aggressive anti-inflationary campaign.
If just a couple of weeks ago, traders expected that the US central bank would raise rates by 50-75 bs in September, now they have a 100 bps step in their field of vision.
Markets are currently estimating a 37% chance of a full-blown increase.
A sharp rise in hawkish expectations propelled 10-year US Treasury yields to a 3-month high, triggering a parabolic jump in the dollar.
The DXY index soared 1.44% on Wednesday night. This is the strongest one-day growth from the dollar since March 2020.
JPY in the balance
The Japanese currency suffered most of all from the latest rise in the USD. However, this is hardly surprising: this year, the yen against the dollar demonstrates the worst dynamics among all the currencies of the Group of 10.
Amid the growing monetary divergence between America and Japan, the JPY has fallen against the greenback by more than 20% since January.
After yesterday's release of data on inflation in the US, the yen's position again greatly worsened. Overnight, the Japanese currency collapsed by 1.26% and reached the level of 144.965 in Asian trading.
The approach to the psychologically important level of 145 caused another wave of verbal intervention from the Japanese government.
At a briefing on Wednesday, Japan's Deputy Finance Minister for International Affairs Masato Kanda said he was very concerned about the current fall in the JPY.
"We are closely monitoring the movement of the yen and will react accordingly to exchange rate fluctuations without ruling out any options," he warned.
Many experts were skeptical about the comments of Japan's chief foreign exchange diplomat. In their opinion, in a situation of a total growth of the dollar, intervention, albeit an actual one, is not something that can now help the yen.
The only solution to the problem seems to be a change in the monetary policy of the Bank of Japan. However, there are no signs of capitulation on the horizon yet.
Moreover, the BOJ continues to escalate the situation with its dovish decisions. This morning, the central bank once again increased its planned bond purchases, as the underlying yield of 10-year Japanese bonds approached the upper limit of the acceptable range of 0.25%.
This once again strengthened the belief of traders that the BOJ will not back down from its policy of yield curve control and ultra-soft exchange rate at its next meeting.
And given that the Fed may tighten its tactics even more this month, markets expect a further increase in the divergence in monetary policy between the US and Japan.
Such a scenario would favor the dollar. This means that the USD/JPY pair has every chance to continue its spectacular rally.
