For the first time in nearly three months, breaking through the 153 level, has the yen reached a turning point?

Zhitong Finance APP learned that as more and more people anticipate the narrowing of interest rate differentials between Japan and the United States, there are increasing signs of a turning point for the Japanese Yen.

The Japanese Yen to US Dollar exchange rate has rebounded significantly in the past two weeks from its lowest level since the 1980s, with a nearly 1% rebound on Thursday. Japan's obvious intervention to support the Yen, hedge funds significantly reducing their bearish bets on the Yen, and global arbitrage trades that have been suppressing the Yen all contributed to the recent rise of the Yen.

Whether the current market turmoil can be proven to be a turning point may depend on the decisions of the Bank of Japan and the Federal Reserve next week. About 90% of BOJ watchers believe that the Bank of Japan may raise interest rates on July 31, even if it is not their base expectation. At the same time, more and more people are calling for the Fed to start cutting rates on July 31.

Kit Juckes, Chief FX Strategist at Societe Generale, said, "In the face of better-timed interventions, this clearly looks like closing out positions ahead of a possible rate hike. These are quite large swings, which have raised volatility. As volatility rises, the cost of holding positions also increases."

Data shows that the Yen to US Dollar exchange rate broke above the 153 level for the first time since May 6, rising 0.7% to 152.82 as of the time of writing, rising for the fourth consecutive trading day, outperforming all other G10 currencies. This impact has also spread to the Japanese stock market, with investors pointing out that the rise of the Yen has exacerbated the decline triggered by the sharp drop in the US stock market.

Wei Liang Chang, Macro Strategist at DBS Bank, said, "Given the heightened risk aversion triggered by the sell-off in tech stocks and the still significant speculative short positions, the unwinding of arbitrage trades has boosted the Yen. In contrast to the Fed and the ECB's upcoming rate cuts, Japan may tighten monetary policy next week, deepening the unease among Yen shorts. The further strengthening of the Yen ahead of the BOJ meeting next week should not be overlooked."

Thursday's forward pricing shows a 58% probability of the Bank of Japan raising rates by 15 basis points before July 31, up from around 0.29% last week. If Japan raises rates, the interest rate differential between Japan and the United States will still be around 5 percentage points, but investors believe that the prospect of further rate cuts by the Fed will impact narrowing this gap in the near future.

The recent volatility is not what arbitrage traders want to see, as they prefer stability and Japan's ultra-low interest rates, as they borrow in Yen and then invest in higher-yielding currencies.

Yusuke Miyairi, FX Strategist at Nomura Securities in London, said, "Two weeks ago, almost everyone was talking about Yen arbitrage trades, but now it seems that people have completely forgotten about it and are closing out positions." Recently, with the start of trading in the London market, the Japanese yen has been soaring, indicating that global investors are unwinding arbitrage trades.

At the same time, according to the latest data from the U.S. Commodity Futures Trading Commission, leveraged funds significantly reduced their net short positions on the yen in the week ending July 16, the largest reduction since March 2011. Asset management companies also saw the largest reduction in yen short positions in a year.

Andreas Koenig, Global Head of Foreign Exchange at Amundi SA, Europe's largest asset management company based in London, said in an interview last week, "We believe the yen will become more attractive, so we have reduced our short positions. We have recently seen interventions in the yen, so the uncertainty of holding yen short positions is increasing. We also believe that the U.S. may soon start a loose cycle, which could weaken the dollar."

Homin Lee, Senior Macro Strategist at Lombard Odier Singapore Ltd., stated that the rise of the yen will bring a certain level of caution to the stock market in the short term, as the weakness of the yen has always been a key driver of its strong performance.

Tomo Kinoshita, Global Market Strategist at Sumitomo Mitsui Asset Management Japan, said that the sharp drop in the Nikkei index on Thursday was caused by the decline in the U.S. stock market. However, he added, "The likelihood of the Bank of Japan raising interest rates in July is increasing, leading to a significant appreciation of the yen, which is causing declines in export-oriented stocks and stocks heavily reliant on borrowing."