The Bank of Japan intervened in the FX markets this morning, only this time instead of checking the USD/JPY rate, they actively intervened by selling US dollars for the first time since 1998.
Today’s move comes just hours after the central bank left its own monetary policy on hold in the face of rising inflation, albeit at a much lower rate of 3%.
The lack of active signs of a change in monetary policy stance was taken by traders as a green light to take the US dollar to a fresh 24-year high above 145.00 and a new high of 145.90.
The Yen’s speed is falling just hours after this morning’s monetary policy decision and the Fed’s decision to raise interest rates further raised the very real prospect that we could well see a move towards 150.00 in the next few days.
This appears to have raised concern from the Japanese authorities and this morning’s aggressive action certainly appears to have caught markets by surprise, sending the US dollar sharply lower.
The big question is whether it will make a difference and change the long-term direction of the Japanese Yen’s decline.
The 145/146 level appears to be a level that the Bank of Japan appears to be defending at the moment as last week’s rate check came in at similar levels.
Today’s intervention was confirmed by the Japanese government, as Masato Kanda commented that Japan had taken “bold action” in the markets to counter “sudden” and “unilateral” movements.
He went on to say they had no choice but to respond to these “excessive” moves and retained the option to proceed.
The big question now is whether this morning’s action will make a difference.
This is likely to be the case in the short term as it will unwind any weak long US and short yen positions meaning we see a move through the 141.00 area and towards 140.00 could.
If the Japanese authorities are to play to their advantage, they may want to further intervene to push the US Dollar below 140.00 over the next few days.
This will be difficult with the current monetary policy framework, which is opposed to today’s interventions in the markets.
Today the Bank of Japan had an opportunity to slightly reset its monetary policy stance but it didn’t happen, leading to a rally to 145.90 which we saw this morning.
This means that once the dust settles on today’s intervention, we could well see further upside towards 145.00 and 150.
The main reason for the weakness of the Japanese Yen is the current BoJ monetary policy stance and the fact that interest rates are negative at -0.1%.
Today’s intervention has helped slow the pace of the yen’s decline somewhat, but this is unlikely to change given monetary policy settings at current levels.
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