G10 FX Weekly: USD/JPY Upside Limited as Japanese Officials Sound Warning
Summary
- USD/JPY has traded above 150 in the past week or so for the first time since mid-November.
- This immediately prompted verbal intervention from Japan’s Ministry of Finance (MoF), opposing JPY weakness.
- Should the pair remain above 150 and push towards the 2023 high near 152, we expect additional verbal intervention. We are also very wary of actual intervention in the FX market.
Market Implications
- We think upside is limited in USD/JPY given the threat of Japanese officials buying yen in the market.
- Nonetheless, the market could try to test the resolve of Japan’s policymakers, with the resulting intervention likely to see a sharp reversal lower in USD/JPY.
- This uncertainty means we prefer to stand aside in USD/JPY.
USD/JPY Trades Back Above 150
USD/JPY has staged an impressive rally this month. Since bottoming out intraday on 1 February just below 146, the pair achieved a recent high just below 151 last week.
Before that, only eight weeks ago, USD/JPY was trading just above 140, having fallen from ~152 in mid-November as US yields dropped across the curve.
Chart 1: Orange Line = USD/JPY spot price
US Yields Remain the Main Driver of USD/JPY
As my colleague Bilal Hafeez argued a few weeks ago, the main driver of USD/JPY is US yields.
Price action in the pair over the past three or four months validates this.
The US 10-year yield fell 80bps from mid-November to late December, dragging USD/JPY from ~152 to ~140.
Conversely, from late December to now, the US 10-year yield rose 48bps, lifting USD/JPY from ~140 to above 150.
Chart 2: Orange Line = US 10-Year Yield
Japanese MoF Very Quick to Launch ‘Verbals’ Above 150
Last week, on 13 February, USD/JPY traded back above 150 for the first time since mid-November.
Within 24 hours, senior MoF officials pushed back on JPY weakness.
Japanese vice finance minister Masato Kanda said speculative flows drove much of the yen’s recent weakness. He said these ‘aren’t desirable,’ adding that ‘authorities are ready to respond 24 hours a day, 365 days a year.’
Finance minister Shunichi Suzuki echoed these comments on the same day. He said he is watching currency market developments with an even stronger sense of urgency, and that rapid FX fluctuations are undesirable.
This MoF stance echoed sentiments expressed in November, when USD/JPY last surged above 150.
As back then, these most recent comments from Japanese officials raise the likelihood that actual FX intervention will occur, as happened back in October 2022.
BoJ/MoF Will Hope US Yields Reverse Lower
As outlined above, when Japanese officials last verbally intervened in November, USD/JPY pulled back into year end. However, a decline in US yields drove this, meaning FX intervention to combat yen weakness was unnecessary.
The BoJ and MoF would welcome repeat price action in the US rates market as lower US yields would almost certainly pull USD/JPY down.
This might not happen imminently, however. Although they have pushed aggressively and rapidly higher, our view remains that 10-year and 30-year US yields probably have a little more upside before peaking.
Should US yields climb further, we expect upward pressure on USD/JPY to continue.
We Remain Cautious on Further USD/JPY Upside
Nonetheless, because FX intervention risk has increased, we take a cautious view of USD/JPY.
If the pair approaches last year’s high near 152, we see an asymmetric risk that Japanese intervention drives USD/JPY down materially. As such, we remain on the sidelines.
Richard Jones writes about FX and rates markets for Macro Hive. He has traded and invested in interest rate and FX market portfolios spanning three decades, both on the buy-side and sell-side.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)
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