G10 FX Weekly: MoF Makes Selling USD/JPY Rallies Compelling

Summary

• USD/JPY briefly printed above 160 on 29 April, a public holiday in Japan, before quickly falling back below 155.
• Money market data suggested the Japanese Ministry of Finance (MoF) bought about 5.5tn yen that day.
• A second bout of intervention, following the Fed policy update on Wednesday, saw the MoF buy 3.5tn yen, leading USD/JPY to fall from ~157.50 to ~153 within minutes.

Market Implications

• We argue the MoF is showing strong resolve to resist recent JPY weakness. USD/JPY has probably topped out, with further intervention likely.
• USD/JPY is a sell on rallies, as the MoF is unlikely to let the pair strengthen materially.

The MoF Finally Delivers After Lots of Talk

After several weeks of verbal intervention, Japan’s MoF finally stepped into the market this week. It bought JPY twice this week to drive USD/JPY down from an intraday high just above 160 on Monday to ~153.

We have been expecting this since verbal intervention since late February, and the MoF finally delivered.

The first bout of intervention occurred on Monday, which was a Japanese public holiday, with money market data pointing to an intervention of about 5.5tn yen, or about $35bn.

This pushed USD/JPY from its multi-decade peak just above 160 to below 155, before the pair retraced higher to near 158 over the next day or two.

The second bout of intervention occurred after the Fed press conference on Wednesday, with the consensus estimate of about 3.5tn yen (or about $23bn) being purchased by Japanese authorities.

In sum, therefore, the MoF has purchased about 9tn yen, or just under $60bn this week.

This Could Just Be the Start of MoF Intervention

As my colleague Viresh Kanabar wrote on Tuesday, after the first round of JPY buying and ahead of the second round, we did not expect the MoF’s yen buying to be ‘one-and-done.’

Previous interventions have been conducted on multiple occasions, often spanning several months, so the second intervention was not a surprise.

Moreover, we see a high probability of additional JPY buying from the Japanese authorities.

If this week’s actions have shown anything, it is that MoF resolve to counter JPY weakness is strong.

Interest Rate Differentials Have Made the MoF’s Task Tougher

Viresh also highlighted that interest rate differentials, in favour of the USD, have driven USD/JPY strength in recent months. USD/JPY carry is the highest in over 20 years.

And the disparity in USD and JPY yields has accelerated over the last month (Charts 3 and 4).

Given JPY weakness is an outlier versus the USD relative to its peers, it is perhaps unsurprising that the MoF finally intervened.

This does mean, however, that the MoF will have an ongoing fight on its hands, as attractive carry will remain a strong incentive for USD/JPY bulls.

Nonetheless, the MoF Seems Determined to Cap USD/JPY

Even with the challenge of fighting the market in recent days, this week taught us the MoF’s resolve is strong. They will keep resisting what they see as excessive JPY weakness.

And, since CoB on Tuesday, pre-FOMC, the US rates market has moved in a direction that Japanese officials will welcome.

The US 2-year yield is ~8bps lower over the past two days and ~15bps lower than the close at April month end.

Similarly, the US 10-year yield is ~4bps lower over the past two days and ~10bps lower than the April close.

Should this trend of lower US yields continue, it will likely weigh on USD/JPY.

That said, a strong US jobs report today could lead to higher yields (as it has in recent months). If this happens and USD/JPY strengthens, MoF could act again.

For us, this means that USD/JPY is a sell-on-rallies. With the MoF being so aggressive, additional USD/JPY downside is compelling.

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Richard Jones writes about FX and rates markets for Macro Hive. He has traded and invested in interest rate and FX market portfolios spanning three decades, both on the buy-side and sell-side.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)