Intervention

A volatile session for the yen on Friday likely points to a currency intervention from the BOJ or MOF, in an attempt to stop or at least pause the currency’s fast depreciation.

A volatile session for the yen on Friday likely points to a currency intervention from the BOJ or MOF, in an attempt to stop or at least pause the currency’s fast depreciation.

Is the BoJ undoing the government’s attempt to shore up the yen?

USD/JPY resumed its plunge on Tuesday as the dollar continued its recent slide on lowered Fed rate hike expectations and the yen rose despite news that the Japanese government had approved a hefty fiscal stimulus package worth 13.5 trillion yen.

During the gathering of central bankers and finance ministers at the G7 meetings in Japan on Saturday, the US reiterated warnings to its host against intervening to weaken the yen. In the weeks prior to the meetings, Japanese officials had been issuing an intensifying stream of intervention rhetoric attempting to justify Japan’s readiness and willingness to take action in the event of exceptional yen volatility (or perhaps more accurately, yen strengthening). Partly as a result of these public comments and the resulting potential risk of an actual intervention, the yen had been weakening since early May, pushing up the USD/JPY currency pair from its recent long-term lows.

Markets are off to a ponderous start to the week as theres been essentially no new data to digest over the weekend. Global equities, fixed income, and currencies are all essentially unchanged across the board and with no major economic releases on tap for today’s US session (beyond the second-tier Existing Home Sales report at 14:00 GMT), the slow trade could continue throughout the day.

At the start of the week, we highlighted today’s Swiss National Bank meeting as a potential under-the-radar event risk that many traders were overlooking. As we suspected, the central bank did not make any changes to monetary policy, but did take the opportunity to reiterate its review that the Swiss franc is “still significantly overvalued.” For Switzerland’s heavily export-oriented economy, the value of the currency is one of the most important economic indicators, and the lack of upward pressure on the franc after last week’s ECB easing allowed the SNB to remain on hold. Indeed, in more plain language than many other central banks, the SNB vowed to continue intervening in the currency market if the franc should start to strengthen again, noting, that it, “will remain active in the foreign exchange market, in order to influence exchange rate developments where necessary.”

It’s been a rough month for the Bank of Japan. In an effort to inject some much-needed inflationary pressures into the world’s third-largest economy, Japan’s central bank opted to join the negative interest rate club in late January, likely anticipating that it would lead to continued to depreciation in the Japanese yen as a side benefit. As it turns out, that hope couldn’t have been further from the market’s actual reaction.

It’s been a busy day so far for central bankers, especially in Japan and the US. As we noted on Monday, the yen has seen massive safe haven / carry trade unwinding flows over the last two weeks, and as a result, USD/JPY is now falling for its 7^th consecutive day to a new 15-month low under the 115.00 level.