JPY: Accelerated sell-off; can the BOJ halt yen's decline?

Despite 152 and then 155 being seen as the lines-in-the-sand for USDJPY intervention, USDJPY has traded to fresh 34-year highs.

What is driving the JPY weakness?

• Fed’s pivot on the pivot: Last week, Fed member Williams opened the door to bring rate hikes back on the table after inflation, labor and growth metrics in the US continue to surprise to the upside. This has fuelled another leg higher in Treasury yields, widening the differential to Japanese government bond yields, and weighing on the yen.
• Higher Treasury issuance: Treasuries have also been pressured lower (yields moving higher) ahead of the record Treasury auctions that were due this week.
  • The 5yr auction yesterday tailed the When Issued yield by 0.4bps, which means that the auction's yield (the interest rate at which the Treasury note was sold) was higher than the expected yield (known as the When Issued yield). This indicates that the demand for the notes at the auction was lower than anticipated, as investors required a higher yield (return) to purchase the notes, and is a bearish outcome for bonds, so it drives yields higher.
• Risk on sentiment: Markets are in a risk-on and VIX has moved back below 18 with geopolitical tensions easing and technology sector earnings still holding up broadly.

The lack of an intervention

• The break of 155 has questioned why authorities may be staying away from market intervention.
• This could be because they see risks of any intervention being futile at this point when US yields are continuing to run higher, keeping the yen vulnerable. Any strength in the yen as a result of intervention, could therefore remain fleeting.
• US GDP is released on April 25, and the Treasury quarterly refunding announcement as well as the Fed meeting are scheduled for next week. All of these could continue to stoke upside pressures on US yields.

New line in the sand

• Authorities are also likely more focused on the pace of weakness in the yen, rather than levels.
• Japan’s FX Chief Kanda has sort of defined how to measure the pace of yen depreciation. He said a move of 10 big figures in USDJPY in one month could be material. If we consider the lows of 150.80 in USDJPY from early April, then that suggests there is room towards 160 before the authorities see yen depreciation as rapid.
• AUDJPY is at record high, having cleared the psychological resistance at 101. This cross is often considered a sentiment indicator in the financial markets. This currency pair can reflect the overall market risk appetite or risk aversion because it tends to be correlated with global market trends. Any turn in market risk sentiment through either a weakness in US data or a disappointment from Big Tech earnings can disrupt this trend.
• CNHJPY is another pair to watch, as discussed in this article earlier. The breach of 21 and fresh new highs in the pair today could force the Chinese authorities to allow competitive weakening of the Chinese yuan in a controlled manner to keep its exports competitive.

Could the BOJ tilt hawkish at the April meeting?

• The Bank of Japan meeting is underway, and policy decision will be announced on Friday in the Asia morning session (overnight for Europe).
• No interest rate changes are expected.
• The BOJ has already said that a weaker yen could impact monetary policy via the impact on inflation. We could expect this message to get more push at the policy announcement.
• BOJ’s new economic projections are also due. Inflation forecasts for fiscal years 2024 and 2025 are expected to be upgraded from current predictions of 2.4% and 1.8%, respectively. For fiscal 2026, forecasts could suggest that core inflation will align closely with BoJ’s target of 2%.
• BOJ has consistently surprised dovish at its policy announcements, even with the rate hike in March.
• It remains likely that the tone could shift this time as FX concerns remain top-of-mind and the authorities have their hands tied on intervention.
• The guidance of purchase of government bonds, at the current pace of JPY 6 trillion per month, will be key to assess if any tapering is coming. Any flexibility on this would be a signal for bond yields to move higher, and that could marginally support the yen.

What comes next for yen?

• With 155 cleared without a hitch, it appears that markets could be ready to test 160 in USDJPY.
• Any intervention usually results in a 5 yen move for USDJPY. This mean if an intervention was to happen at 158 for instance, we could expect USDJPY to move lower to 153.
• However, USD remains king, and if US rates continue their march higher, the reaction to any intervention will remain short-lived.
• The intervention could, however, have a more lasting impact on other yen crosses where the yield differentials are not as high and risk/reward becomes unfavourable. For instance, CHFJPY and CNHJPY.
• A hawkish narrative from the BOJ or flexibility in its bond buying program could help to slow down the pace of yen depreciation, but not necessarily reverse the direction.
• To reverse the direction for yen, one or more of the below is needed:
  • Fed rate cuts, which don’t seem to be coming anytime soon for now.
  • A credit event that can push FX volatility higher and spook carry trades.