Yen within 4% of wiping out declines from Kuroda's 2014 surprise

[TOKYO] The yen is within 4 per cent of the level it traded at before a surprise monetary easing by the Bank of Japan in October 2014 drove the currency lower. Traders are now wondering what policy makers will do to arrest recent gains.

The currency has climbed against all 16 major peers this month with its biggest advances versus the Mexican peso, South African rand and US dollar. While Japanese markets are closed for a public holiday Thursday, traders will watch for comments from officials given the yen's strength, BNP Paribas SA said. HSBC Holdings Plc warned there's a growing risk the BOJ steps in to sell yen or cut interest rates, while Morgan Stanley sees authorities limiting themselves to warning investors against pushing the exchange rate too far.

"Markets appear to be testing the resolve of the BOJ and questioning the ability of monetary policy action to create a weakening Japanese yen," said Sam Tuck, a senior currency strategist at ANZ Bank New Zealand Ltd. in Auckland. "Nobody really wants their currency bouncing around too rapidly. That in itself, irrespective of the level, does suggest that there could be some smoothing action just to slow it down."

The yen traded 0.1 per cent higher at 113.28 per dollar as of 7:53 am in Singapore after touching 113.12 on Wednesday, the strongest level since Nov 4, 2014. It was at 109.21 on Oct. 30, 2014. Japan's currency has climbed almost 7 per cent since Jan 29. It fetched 128.07 per euro, following a 1.6 per cent advance Wednesday. Europe's common currency fell 0.1 per cent to US$1.1280.

"The growing event risk is that Japan intervenes directly in the FX market," David Bloom, HSBC's London-based global head of currency research, wrote in a report. He suggested policy intervention may take many forms, including rhetoric and more rate cuts.

The yen has climbed against almost all of the more than 150 currencies tracked by Bloomberg this year as evidence China is slowing and renewed concern about a global banking crisis drives investors into havens. About US$7.9 trillion has been wiped from global stocks in 2016, while around 30 per cent of global sovereign bonds - another relatively safe asset - now yield less than zero.

The BOJ unexpectedly said Jan. 29 that it will follow Europe by adopting negative interest rates, causing a brief slump in the yen. It's surprise easing in October 2014 has a more sustained impact, helping drive the yen to a 13-year low of 125.86 on June 5, 2015.

Intervention in the currency markets would be a major event for Japan. The nation hasn't bought or sold currency to sway the yen's price since a record intervention in 2011 helped stop its advance to a post-World War II record.

Action from the BOJ would likely roil other nations that are already dealing with the fallout of China's surprise currency devaluation last August. In recent weeks, India and Kenya have called for coordinated action by monetary authorities of Group-of-20 nations to address the turbulence in foreign- exchange markets this year. The G-20 summit in in Shanghai on Feb 26 and 27 will bring together finance ministers and central-bank governors from the world's biggest developed and emerging markets .

"Markets clearly want to test further lower on dollar-yen," Mr Tuck said. "One of the things holding it up is that perception of the possibility there'll be some smoothing action from the Bank of Japan or some official support for dollar-yen."

BLOOMBERG