G10 FX Weekly: USD/JPY Heading Into the Danger Zone
- By Richard Jones
- 5 min read
After pulling back to a low 149-handle last week, USD/JPY is now trading back up to ~151. The wild ride in the pair is worth breaking down, especially the whiplash price action from last week and into this week.
This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.
Summary
- USD/JPY has been on a rollercoaster ride for the past 10 days or so.
- After rallying hard post-Bank of Japan (BoJ) last week, verbal intervention from the Japanese Ministry of Finance (MoF) and a slide in US yields saw it sell off sharply.
- This week, the pair rallied again to within ~0.5/0.75% of last week’s spike high.
Market Implications
- We think that this week’s rally moves the pair back into the MoF’s intervention crosshairs and see material risk of official Japanese yen buying.
- As a result, we are wary of long USD/JPY and do not take a position, convinced the market will test the MoF’s resolve and trigger intervention.
USD/JPY Has Rebounded This Week
After pulling back to a low 149-handle last week, USD/JPY is now trading back up to ~151. The wild ride in the pair is worth breaking down, especially the whiplash price action from last week and into this week.
Last Week’s Price Action Was Wild
The BoJ’s policy tweaks last week did little to deter the USD/JPY bulls. The market took the pair to a new YTD high near 152, just below last year’s 30+ year peak.
Yet USD/JPY tumbled in the days following the BoJ’s latest policy update due to verbal intervention from the Japanese MoF. Downside momentum then gained on a big drop in US yields following the QRA, Fed meeting and US jobs report.
MoF Verbal Intervention Takes the Shine Off USD/JPY
After the 31 October BoJ policy announcement, in response to the sharp USD/JPY rally, the MoF warned the market about possible intervention.
Japan’s top currency official at the MoF, Masato Kanda, said authorities are ready to intervene: ‘We’re on standby … I can’t say what we’ll do, and when – we’ll make judgments overall, and we’re making judgments in a state of urgency.’
He added that ‘we’re very concerned about one-sided, sudden moves in currencies … Fundamentals don’t move several yen in one night.’
These MoF comments took USD/JPY off its highs, but the bigger move was yet to come, triggered by a sharp drop in US yields across the curve.
US Rates Market Helps the BoJ/MoF
The first leg of the decline in US yields began Wednesday last week. The catalyst was a relatively benign QRA, where the US Treasury increased its auction sizes for this quarter less than expected.
The slide in yields continued later that day when the Fed announced no change in its interest rate policy, convincing markets the Fed has finished tightening.
In sum, the 2-year yield fell ~14bps, while the 10-year fell ~20bps that day.
The slide in yields continued Friday after the NFP print as headline was lower than expected with net downward revisions to the previous data.
Although labour strikes in the auto industry distorted the number, the market still had a very strong dovish reaction. The 2-year yield dropped ~15bps, with the 10-year also down ~9bps.
This reaction saw USD/JPY retreat from last Tuesday’s YTD high. From peak to close last week, USD/JPY fell ~1.6%, from 151.72 to 149.32.
The Market Still Has to Beware of MoF Intervention …
The BoJ and the Japanese MoF will have welcomed this price action. However, the USD/JPY rally this week means we expect official intervention to happen – perhaps on a return to last week’s high near 152.
In that regard, USD/JPY is grinding higher this week, currently trading at ~151. Although the timeframe is unclear, we consider it almost inevitable that the FX market will test the MoF’s resolve in defending the yen.
… As Actual MoF Intervention Usually Works (Eventually)
The MoF have vast experience in FX intervention, and things tend to go their way.
They shifted to more verbal intervention post-GFC, but that is because they continue to get their way rather than a change in tactic, it seems. Even when things appear to not go their way at first, they continue (sometimes by physically intervening) until they succeed.
Nonetheless, not everyone thinks physical FX intervention will lead to USD/JPY trading lower.
There is some validity to this. We find the MoF have a low percentage of successful interventions based on the first intervention in a series of close intervention operations (Chart 2). This is especially so when they are selling USD/JPY, even after three months.
However, one thing is clear: the MoF will get their way eventually. When we switch to using the final intervention date, the success rate creeps to near 70% when selling USD/JPY (Chart 3).
USD/JPY Is Not the Only Problem for Japanese Policymakers
USD/JPY has garnered the most attention from market commentators. But importantly, the yen is also at multi-decade lows on a trade-weighted basis.
In addition to USD/JPY, EUR/JPY is the second biggest component of the JPY TWI, with both pairs together forming ~85% of the index. And the recent rally in EUR/JPY has lifted the pair to a 15+ year high.
Intervention Risk Keeps Us Sidelined in USD/JPY
As we wrote last week, the threat of MoF intervention keeps us on the sidelines in USD/JPY.
This week’s price action has strengthened our resolve. The pair is less than 1% away from last week’s high (which itself was very near the 30+ year high seen in October last year). And while it is impossible to determine when the MoF will act, we are on intervention watch as we approach 152.