Japan’s MoF had been warning the market over aggressive JPY moves in recent weeks and decisively pulled the trigger today. The Bank of Japan intervened, near the 75.60 area to an initial high near 79.00 (at the time of writing). Just this morning, Japan’s finance minister Azumi was warning the market that he was ready to take ‘determined’ steps against JPY strength and that speculative moves were strong. Ultimately, Japan’s actions can buy time but the USD negative forces remain strong in our view and we maintain there is room for USD-JPY to gradually trend lower towards 74 come year-end.
The last time Japan’s authorities intervened against the JPY was 4 August this year, which pushed USD-JPY briefly above the 79.00 level, or roughly a gain of 4.5% on the day. It appears that today’s intervention happened at the same time of day as the previous action (see Chart 1).
It is often assumed that Japan’s unilateral intervention is not successful (Chart 2). However, we have to bear in mind that USD-JPY was very stable through the period of significant market volatility in September and early October. So Japan’s FX intervention helped build a reasonable, albeit temporary, floor in USD-JPY, which given the volatility in markets in recent weeks was remarkable.
The interesting twist about this JPY intervention is that the MoF/BoJ acted before this week’s G20 meeting on the 3rd and 4th (Thursday/Friday). We know that Japan’s authorities have told the G7 and other G20 countries that it is prepared to fight against JPY strength. But Japan is pushing aside concerns about international political sensitivities with regards to its FX intervention activities. So, we have to be prepared of further rounds of MoF/BoJ FX intervention against the JPY.
The endgame is that such actions could reinforce the USD being the ‘risk off’ currency of choice. That is, if the market cannot buy CHF or JPY when market stress intensifies sharply, then it will pile into the USD in a more aggressive manner for liquidity. For example, when the SNB’s floor in EUR-CHF was established and concerns over Eurozone sovereign risk remained very high, this proved to be a key tipping point for EUR-USD to fall sharply.
We have seen how there has been a rotation of the primary ‘risk off’ currencies this year. Before Japan’s earthquake, it used to be the JPY was the currency most likely to benefit in a ‘risk off’ scenario. Then after Japan’s earthquake, the CHF took that title but after the SNB’s floor, the USD moved into that position. This does not mean the USD is a better safe haven currency but if the currency market wants liquidity and during times of fear, it will shift into the USD.
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HSBC Global Research