That old chestnut
The Japanese Yen is a key currency within FX markets. The Yen plays an important role in markets with an evolving response to risk. The Yen has increasingly diverged away from its traditional safehaven role with the US Dollar and Swiss Franc more often picking up the slack. As a result of the monetary and economic backdrop in Japan it has been in seemingly endless decline versus the US Dollar post-Covid. During its 50% decline in the last 5 years, monetary authorities have attempted to intervene many times. Clearly, with the benefit of hindsight, those intervention efforts in the long-run have been thwarted.
Currency intervention is not seen as credible either where it is not seen as a necessary value correction to resolve a temporary price dislocation. Currency intervention will also fail when the market believes the authority won’t stop at any cost. In effect non-credible market intervention only hands a free lunch to traders and investors by offering a temporary discount to a favoured position. Intervention in the Yen this time might just be different. Last week the US and Bank of Japan performed a coordinated joint currency intervention in the Yen. It’s estimated the BoJ bought some $87bn worth of Yen with the US opting to sell Euro in favour of JPY via the New York Fed.
Following this intervention the Yen has pushed higher by circa 4%, despite some limited episodes of JPY selling in open trade yesterday. So, what might be different this time and why should we be looking closely at this latest round of currency intervention? Firstly, it’s not the first-time joint intervention has taken place but the inclusion of the US in this latest effort will add a multiplier to the value of the open market operation. Secondly, for the first time in a long time the composition of the BoJ is emergingly hawkish allowing monetary policy to support intervention efforts. Lastly: positioning. Market positioning is stretched in favour of the US Dollar. So much so that open market interest in the US Dollar is now at its highest level in over a decade. The conclusion of this is that the market may be more vulnerable to selling efforts against the greenback allowing FX, including the Yen, to benefit.
Discussion and Analysis by Charles Porter
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