Well, you can’t say you didn’t see that coming. The noise around FX intervention out of Japan had clearly picked up over the past few sessions, and not without reason. USD/JPY pushed cleanly through the 160 handle, printing a high around 160.72, before suddenly dropping off a cliff. Initially it wasn’t clear whether that move was outright intervention or just heavy-handed jawboning. But as the selling gathered pace, it because obvious that a 500-pip reversal doesn’t happen in a vacuum. It certainly had the feel of official hands getting involved. And now, Nikkei confirmed intervention. The question now is what happens next. With the BOJ not committing (or being prevented to by the government) to tightening, and with US rate hike odds increasing with oil prices, this should keep the long term USD/JPY forecast tilted to the upside.
How committed is Japan in defending 160.00?
We had long suspected 160.00 was the line in the sand and so it has proved. But now let’s see how committed the Japanese government is to defending this level. Will they intervene again, should we get closer to 160.00 again? How much of its dollar reserves will it burn in the process? The markets will certainly be asking questions, and will not go down without a fight.
Technically, the pair has found some mild support now around the lower bound of its long term bullish channel, finding some footing around the 155.50–155.70 region. That bounce isn’t surprising.
If this turns out to be more of a warning shot than a sustained intervention effort—and with oil prices still elevated—there’s a decent chance the USD/JPY starts grinding higher again, with 160.00 now firmly established as the line in the sand for Tokyo.
USD/JPY forecast: Defending the yen will be costly
From a macro standpoint, very little has changed. The underlying drivers remain firmly yen-negative. Rate differentials are still wide, Japan is still running deeply negative real rates, and the dollar continues to attract demand thanks to rising oil prices. Unless we see persistent and coordinated efforts to suppress the pair, the longer-term USD/JPY forecast remains tilted to the upside. This year’s energy shock, in particular, makes it harder for intervention alone to shift the trend in a meaningful way.
The latest intervention was triggered during the European session, following comments from Japan’s Finance Minister, Satsuki Katayama, who warned that authorities are “nearing the time to take bold action on FX.” Markets didn’t take that lightly, but now let’s see what happens next. I certainly do think that much of the move has already happened and I wouldn’t be surprised if the UJ were to start pushing higher again from here.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
