• Yen rallies on cocktail of developments

• BoJ Summary could offer more policy clarity

• The report will be published on Wednesday at 23:50 GMT

Yen skyrockets more than 12% after intervention

After hitting a 38-year low against its US counterpart on July 3, the Japanese yen entered a consolidative phase and then, on July 11, helped by an intervention episode, it staged an unprecedented recovery, with dollar/yen tumbling as much as 12.5%.

The intervention episode may have prompted market participants to start unwinding profitable carry trades, with the broader risk aversion adding extra fuel to the yen’s engines. The BoJ’s decision to raise interest rates by more than expected last week and the disappointing US employment report for July, which raised recession fears, may have given extra reasons for investors to keep buying the yen.

Traders await Summary of Opinions for hike clues

With all that in mind, attention for yen traders may now fall on the Summary of Opinions of last week’s gathering, due out late on Wednesday, during Thursday’s Asian session. Last week, policymakers decided to raise interest rates by 15bps at a time when market participants were penciling in a slightly more than 50% chance for a 10bps increase. Officials also agreed to taper the pace of their monthly bond purchases, aiming to take it down to around 3 trillion yen by April 2026.

Traders may dig into the summary for clues and hints on how willing policymakers are to continue raising interest rates and how soon they are planning to hit the hike button again.

On Monday, the minutes of the June gathering revealed that nine members called for a rate increase then, underlying the Bank’s policy shift and suggesting that the summary of the July meeting may also have a hawkish flavor, pointing to more rate increases this year.

Currently, investors see around a 75% probability for another 10bps hike by the end of the year, though they anticipate no action at the upcoming meeting on September 20. If the Summary of Opinions reveals more-hawkish-than-expected language, with officials clearly favoring more increases, the yen may enjoy more gains as the yield spread between the US and Japanese yields continues to narrow.

Is the rally overstretched?

That said, the tumble in Treasury yields may be overstretched currently, considering that the market has gone as far as pricing in around 125bps worth of reductions this year following Friday’s nonfarm payrolls, which on its own can’t provide a complete picture of the state of the US economy.

The improving ISM non-manufacturing PMI confirmed the notion that any data point suggesting the world’s largest economy is not faring as badly as expected could make investors realize that the number of rate cuts they expect are probably unrealistic. After the PMI, the total number of bps worth of reductions for 2024 dropped to 110. This means that there is the chance of some recovery in dollar/yen before the next leg south.

Dollar/yen to remain bearish even if small rebound occurs

From a technical standpoint, dollar/yen entered a free-fall mode on July 11, but yesterday, it triggered some buy orders near the 141. 60 zone, from which it rebounded and tested the 146.40 area as resistance. The pair is well below its 200-day exponential moving average, which means that even if the recovery continues for a while longer, the bears could still take charge soon.

A drop below 141.60 could initially aim for the 140.20 barrier, the break of which could pave the way towards the low of July 14, 2023, at around 137.10. For the bearish outlook to come into question, the recovery may have to extend all the way above the crossroads of the 200-day EMA and the 152.00 zone.