Gold Decisively Breaks Below $2330, Bitcoin Retreats Below $64,000! The Real Reason Behind the Market's Sudden Turmoil

Gold fell below $2330, and Bitcoin gave back its gains, falling below $64,000. The currency market experienced significant fluctuations, with USD/JPY surging overnight past 160 before quickly falling back. Rumors of a black swan intervention by Japan spread, followed by a modest rebound to 156.71. The sudden market turmoil can be attributed to the Federal Reserve, which is poised to adopt a more hawkish stance as early as this week.

Tensions in the Middle East have eased, according to the Financial Times, with Israel significantly softening its stance in hostage negotiations with Hamas, bringing hope for a diplomatic breakthrough to end the Gaza war.

A diplomat familiar with the negotiations stated that after weeks of stalemate, Israel agreed to a proposal that initially suspends fighting for six weeks, during which Hamas will release 33 hostages, including children, the elderly, women, and wounded prisoners.

Following this news, gold's safe-haven appeal plummeted, pushing prices down to a low of $2326.

During Monday's Asian session, the Japanese yen surged suddenly due to market closure for a holiday, leading to speculation that Japanese officials were losing patience with the economic recession and had made good on their threats to support the economy.

Traders and strategists indicated that the Kishida government in Japan faces a challenge, as any intervention might need to be sustained, especially as markets brace for the Fed to maintain higher interest rates for an extended period this week, enhancing the dollar's appeal.

Yusuke Miyairi, a foreign exchange strategist at Nomura International Plc, commented, "Unless the macroeconomic situation changes, a return to 160 is imminent."

He explained that Monday's yen trading indicated that the market was not overly afraid of clashing with the Ministry of Finance, which oversees the country's foreign exchange policy.

Japan's top currency official, Masato Kanda, did not disclose whether authorities had intervened in the market on Tuesday, stating that any speculative-driven excessive foreign exchange volatility would have a negative impact on the economy, and appropriate measures would be taken to address such fluctuations.

Citi Group analysts predict that the USD/JPY exchange rate will fluctuate between 155 and 160 as the Fed policymakers meet on Tuesday and Wednesday and investors focus on key economic data to assess the strength of the U.S. economy.

Source: Bloomberg

Cameron Crise, a macro strategist at Bloomberg, stated, "Although official confirmation may not come for a while, it appears that we can chalk this up as a successful intervention scorecard."

Krishna Srinivasan, the IMF's Asia and Pacific director, speaking at a regional economic outlook briefing in Singapore, mentioned that the dollar has been strong against the backdrop of a robust U.S. economy, persistent inflation, and the monetary policy path. He vaguely noted that central banks sometimes consider intervention appropriate under certain circumstances.

However, he did not specify any jurisdiction, explaining that market functions can sometimes be impaired, leading to large and rapid misalignments in exchange rates, which can be disruptive and pose challenges to financial stability. In such cases, intervention is sometimes appropriate.

The yen is poised to fall for the fourth consecutive month, as the Bank of Japan last week kept its benchmark interest rate between 0-0.1% and showed no signs of reducing bond purchases, giving traders new reasons to sell. Meanwhile, in the U.S., the Federal Reserve is expected to keep interest rates above current levels by about five percentage points before the fourth quarter.

Leah Traub, a portfolio manager at Lord Abbett & Co., noted that the yen "has been particularly closely watching the interest rate differential between the U.S. and Japan this year." She emphasized, "Although Monday's move appeared to be an intervention by authorities, any effects of such temporary interventions will be very short-lived. If the Bank of Japan and the Ministry of Finance wish to prevent further depreciation, they will have to change guidelines to reflect reduced bond purchases and/or an increase in interest rates."

Given the economic backdrop in the U.S., the task for the Japanese government may only become more challenging in the coming days. According to Bloomberg Economic Research, the Fed might signal a more hawkish stance as early as this week.

This week's economic data will also be crucial, with a focus on the U.S. Non-Farm Payroll (NFP) report for April, due out on Friday. Signs of economic weakness could reignite expectations that the Fed might ease policies sooner than the market currently anticipates. The report is expected to show a slowdown in job growth for the month but still at robust levels.

"Weak non-farm payroll data could save the Treasury," stated Yusuke from Nomura International.

All this suggests that Japanese policymakers hoping to support their national currency might face a tough battle ahead.

Tom Fitzpatrick, Managing Director of Global Market Insights at RJ O'Brien & Associates, stated, "The biggest mistake in intervention without policy support is to draw clear boundaries."

He noted that if Japanese portfolio managers believe the dollar will remain strong or appreciate further, this could provide them with an opportunity to increase their holdings of unhedged U.S. fixed-income assets.

"If you are a Japanese investor, this is a gift," he said.