G10 FX Weekly – JPY: Rising FX intervention risk

by: Roy Teo

In this publication: Yen has rallied 8% since BoJ announced negative interest rates. The risk is rising of FX intervention by the Ministry of Finance. Past interventions show that there is a maximum intervention impact on Friday morning

 

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Japanese yen rallies 8% since BoJ announced negative interest rates

The Japanese yen (JPY) has rallied dramatically, more than 8% against the US dollar (USD), since the Bank of Japan (BoJ) announced negative interest rates on 29 January.  There are several reasons for this. For a start, investor sentiment has continued to deteriorate resulting in safe-haven flows into the yen. Moreover, financial markets have scaled back expectations that the US Federal Reserve will tighten monetary policy this year. As a result, US yields (2 year) have declined considerably. This has increased the downward pressure on USD/JPY. The triggering of rumoured stop loss orders has accelerated the move in USD/JPY.

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Rising risk of FX intervention by the Ministry of Finance

Given that the BoJ decision last month to introduce negative interest rates was a close call (5-4 vote), it will take some time before BoJ members will come to an agreement on further monetary stimulus. The next scheduled monetary policy meeting is on 15 March. Therefore, the pressure is now on the Ministry of Finance (MoF) to intervene in currency market to warn speculators that the direction in the yen is not a one-way bet. Indeed, data from CFTC show that speculators’ net long futures position in the yen have surged in the past few months to the highest levels since the MoF last intervened in October 2011 (see graph below).

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In addition, the yen’s volatility has more than doubled since December last year. Indeed, Finance Minister Aso and his deputy have commented that recent moves in the yen have been ‘rough’ and are watching for speculative moves. However, financial markets have continued to push USD/JPY lower as they test when FX officials would pull the trigger to intervene in currency markets. If there is no FX intervention and/or improvement in investor sentiment, further downside in USD/JPY towards 110 in the coming weeks cannot be ruled out.

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Previous FX interventions show maximum impact on Friday morning

The past four FX interventions by the MoF often occur during early Asian trading hours but not on a specific day. However, we judge that the impact of FX interventions in USD/JPY will be the largest on a Friday morning. Hence, the next live date for intervention could be on 12 February Asia morning. The G20 Finance Ministers’ and Central Bank Governors’ meeting on 26-27 February is not a hurdle for Japan to intervene earlier as they did previously as well on 31 October 2011, days before the G20 leaders’ summit.

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