Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
JPY: Intervention alert, or a BOJ alert?
Charu Chanana
Chief Investment Strategist
Summary: Intervention threat for Japanese yen has stepped up after a trilateral meeting between Japan, South Korea and US officials and a G7 statement suggesting that the US could be tolerant of an intervention. There is reason to believe that Japanese officials could be more vigilant to defend the 155 handle in USDJPY, and a slowing pace of USD gains along with a BOJ meeting next week could also make an intervention more effective.
Japanese yen has been on intervention alert for some weeks as USDJPY rose above the key 152 level on April 10 and breached 154 on April 15. The resilience in the US economy, sticky inflation and a pushback from Fed members saw US yields rushing to fresh highs, and that weighed on the yen.
However, only verbal intervention came through from Japanese authorities. This made complete sense because an actual intervention could have been futile in the rising US yield environment. While a knee-jerk reaction could have brought USDJPY back towards 150, the wide and increasing yield differential between the US and Japan could have reversed that move quickly.
But there is reason to believe that intervention threat has stepped up now and officials may be looking to defend the 155 handle, because:
Hawkish Fed repricing could be close to an end for now
The strong US economic data and the pushback from Fed members on rate cut expectations have largely been priced in by the markets. Market now expects the first full rate cut from the Fed only in November and less than two rate cuts this year. There may have been some hesitancy to fight the strong dollar move as it was playing out in the last few days, but that seems to be nearing a peak for now.Other Asian currencies have come under pressure as well
While JPY is down 1.7% against the USD month-to-date, the Korean won (KRW) and Indonesian rupiah (IDR) are down 1.9% each. The Indian rupee (INR) fell to a record low on Wednesday. The strong US dollar has been a headwind for Asian currencies, and this has led to a coordinated effort from Japanese and Korean finance chiefs to discuss this with the US in a trilateral meeting.G7 comments suggest international coordination may be likely
With the G7 meetings ongoing in Washington, there were reports that US Treasury Secretary Janet Yellen took note of worries from Japanese and Korean officials on FX. While room for a coordinated intervention may still be small, these comments suggest that US authorities may be tolerant of an intervention if one was to come from Japan (or Korea) and risk of getting tagged as a currency manipulator has been addressed.BOJ meeting next week
The next Bank of Japan meeting is scheduled for April 26, and Governor Ueda has said that yen’s impact on inflation expectations will be a key factor. A weak yen pushes up the cost of energy imports. This could mean another surprise rate hike by the BOJ, or at the very least, a hawkish stance to guide for another rate hike. This could make an intervention response more likely to stick.
While the stepped-up warnings may again be about buying time, there seem to be clear indications that Japanese authorities will try to defend the 155 handle in USDJPY. Any yen intervention could bring USDJPY to test 150. Such a move could also pause the rally in Japanese equities.
Also, worth watching CNHJPY where a break above 21 has been a concern for Chinese authorities, as discussed in this article. When a negative carry is prohibitive to position for yen strength against high-yielding currencies, traders can consider at CHFJPY where the interest rate differentials are less stark.
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Other recent Macro/FX articles:
18 Apr: Global Market Quick Take - Asia
16 Apr: Chinese Yuan’s Double Whammy - Dollar Strength and Yen Weakness
12 Apr: Riding the Fed-ECB Policy Divergence
11 Apr: ECB rate decision: How to trade the event
9 Apr: CAD vulnerable as market underprices dovish Bank of Canada risks
9 Apr: US inflation report: How to trade the event
8 Apr: Macro and FX Podcast: NFP, CPI, ECB and Japan
3 Apr: Chinese yuan bears are undeterred by PBoC’s grip
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20 Mar: Japan’s exit from negative rates: Implications for the economy, yen and stocks
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