U.S. commodity exporters and pharmaceutical companies are among the top traders, with Japan casting a cautious eye toward the foreign exchange markets, in the coming days.

Top exporters with significant Japanese interests include Exxon Mobil Corp (NYSE:XOM) and Chevron Corp (NYSE:CVX).

The weak yen which, on Wednesday, fell to a 34-year low against the dollar, has been a boon for Japanese exporters, but it makes the country’s imports more expensive.

But it’s a stable economy with low — almost non-existent — levels of inflation, which make it an attractive investment location for many U.S. companies.

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Supporting The Yen In The FX Market?

However, Japanese monetary authorities could be about to throw confusion into the dealings between the two countries, as there’s talk of market intervention by the Bank of Japan to prop up the ailing yen.

Earlier this month the BoJ raised its key interest rate for the first time in 17 years. Edging the rate from -0.1% to a range between 0% to 0.1%, it barely caused a stir on the markets. Notification a few weeks earlier that the BoJ was to take a more hawkish stance at its upcoming meeting had a more significant impact.

But the yen resumed its drop against the dollar and, this morning, the dollar climbed to 151.97, a low for the yen not seen since 1990.

Thus, speculation of intervention has been increasing over the past few days.

“The risk of intervention increases as the dollar approaches 155,” said analysts at Bank of America. But, as they pointed out, “intervention is not a fundamental fix for the yen.”

Blocking Short Sellers

Indeed, in previous bouts of intervention, it has mainly been used to cause confusion and headaches for short sellers and those indulging in the carry trade — where low-yielding currencies such as the yen are sold to fund purchases of higher-yielding currencies.

It also causes headaches for those U.S. companies doing business in Japan, which also include drugmakers such as Eli Lilly & Company (NYSE:LLY), as wild fluctuations in foreign exchange make it harder for them to forecast returns to investors from overseas operations.

Jane Foley, chief FX strategist at Rabobank, noted an increase in net short sellers last week.

She added: “In an environment of low FX volatility, carry trades tend to be attractive. In the absence of a strong expectation of a series of rate rises from the BoJ, betting against the dollar could be an expensive trade for many speculators.

“This explains the sell-off in the yen this week after the BoJ's rate hike.”

Thus, even though the U.S. Federal Reserve has yet to announce its timing for a first-rate cut — although the market knows it’s coming — the dollar retains the upper hand on the yen due to its large rate differential, with the main U.S, rate still at 5.25%-5.5%.

Exchange traded funds that follow bullish bets on the dollar have gained since the start of 2024. The Invesco DB US Dollar Index Bullish Fund (NYSE:UUP) is up 4.5% on the year.

Conversely, the best-performing yen-based ETF has been the ProShares UltraShort Yen (NYSE:YCS), which tracks shorting behaviour on the Japanese currency. It has gained 18.4% in 2024.

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