USD/JPY has been a key focus in trading this week and all the while as oil prices ramp higher alongside bond yields, the currency pair is also gradually pushing up in hitting fresh 40-year highs. After some trepidation in May, it has been one-way traffic for the currency pair in recent weeks. That being said, the move higher has been gradual and managed with traders not wanting to run too far, too fast.
There was a bit of a scare in early July but since then, traders have become emboldened to take USD/JPY higher with the US-Iran conflict starting up again.
While Tokyo officials have been offering some verbal intervention, MUFG believes that the current price action in USD/JPY doesn’t quite warrant any intervention plays just yet.
“The USD/JPY rate has hit the highest level since December 1986 and what is noticeable about that is the lack of attention this is now getting. With the move a slow grind and with broader G10 and USD/JPY volatility levels so low the MOF’s justification for intervention is simply not there. The 1-month implied volatility in USD/JPY fell below 6% last week for the first time since February 2022.
We did get a comment from Finance Minister Katayama who laid the blame for yen weakness solely on the worsening situation in the Middle East but added that “we will take appropriate and bold action at any time, should the need rise”. That’s an interesting caveat – “should the need arise” which clearly suggests a lower sense of urgency than at previous times when intervention took place. There is certainly a shift in urgency in Tokyo which may point to resignation and reluctant acceptance of allowing the yen to weaken as long as the pace of the move is gradual.”
I reckon part of that resignation to allow USD/JPY to continue to gradually and slowly move higher is the fact that the fundamentals have once again worsened for the yen currency itself.
The fact that the US-Iran war has reignited just means that Japan will continue to feel the pinch of tighter oil supply and rising energy prices will continue to weigh heavily on firms as inflation worries grow. Adding to that is the fact that cost-push inflation is now seeping into the economy and making it more complicated for the BOJ to focus on wage price inflation as the key driver to raising interest rates further. That amid a slowing economy and rising fiscal worries as well.
It’s all looking very dicey for the Japanese outlook at this stage.
Taking that into consideration, it makes sense that Tokyo officials will feel that for as long as the threat of intervention can help effectively slow the decline in the currency, they will try to get away with that for as long as they can. Otherwise, any intervention play that is immediately counteracted by market forces/flows will just make the next one less effective. In turn, that will also make the threat of the next play even less fearful too.
Essentially, it’s a psychological game now more than anything else for USD/JPY.
This article was written by Justin Low at investinglive.com.