G10 FX Weekly: Buying USD/JPY Favoured Despite Looming MoF Intervention
Summary
USD/JPY has printed a 30 year high this week, surpassing the previous intraday high above 160 seen on 29 April.
Japan’s Ministry of Finance (MoF) intervened in the FX markets that day, buying JPY.
This shunted USD/JPY down to an intraday low just below 152 in the following days.
Market Implications
We expect profit-taking from those traders going long USD/JPY in recent weeks, as further MoF intervention is possible and could provide another sharp pullback in USD/JPY.
However, being long USD/JPY from a carry perspective remains attractive, and we think USD/JPY remains a near-term buy-on-dips down to and below 154.
We would not buy at current levels.
USD/JPY Demand Has Been Relentless
The notable underperformance of USD/JPY has been a compelling G10 story in 2024.
So far this year, JPY is clearly the weakest of all G10 currencies, down ~12.1% vs USD.
While the greenback is up against all its major developed market peers in 2024, the USD/JPY rally has been stood out.
Since the MoF’s initial intervention on 29 April, trade has been choppy and difficult, with notable pullbacks (partly driven by the additional MoF intervention).
Nonetheless, USD/JPY has been resilient, coming back bid after the corrective selloffs to surpass the intraday high of 160.17 on 29 April (the high registered on Bloomberg that day). Currently, the pair trades at 160.39, having traded as high as 160.87 yesterday.
Chart 1: USD/JPY Spot Rate = Orange Line
Since MoF Intervention, US Yields Are Lower
This is especially significant as US yields are lower since the MoF started buying JPY on 29 April.
Since then, the 2-year US treasury yield is about 30bps lower.
Chart 2: 2-Year UST Yield = Orange Line
The US 10-year treasury yield has seen similar price action, now ~35bps lower.
Chart 3: 10-Year UST Yield = Orange Line
USD/JPY Carry Is Attractive
Even with these lower US treasury yields, positive carry in favour of USD has made owning USD/JPY very attractive.
The case for owning the pair remains intact today. And with the market pricing less than 50bps of Fed easing this year, only beginning in the autumn, it appears the ‘carry narrative’ will continue favouring the pair.
This will especially be the case if my colleague Dominique Dwor-Frecaut is correct and the Fed does not ease policy this year.
USD/JPY Dip-Buying Likely to Remain Popular
With carry remaining attractive in the coming months, my colleague Ben Ford argues support for the USD/JPY carry trade looks likely to continue.
Though entering the trade at current levels is difficult given the threat of additional MoF intervention, any dips in USD/JPY will probably be bought.
However, prospective USD/JPY longs will likely be patient, waiting until the pair slips closer to (and below) 154.
The pair will almost certainly see profit-taking from those having been long from lower levels which, together with potential MoF intervention, will probably make further gains more difficult in the very near term.
Despite Possible MoF Intervention, USD/JPY Ceiling May Be Higher
Even with potential MoF intervention, some Japanese houses say the ceiling for USD/JPY may be nearer 170.
Sumitomo Mitsui DS Asset Management and Mizuho Bank say USD/JPY could trade about 10 yen higher from here, citing interest rate differentials favour USD.
The MoF has verbally intervened this week, with Vice Finance Minister Masato Kanda saying ‘in the event of excessive moves based on speculation, we are prepared to take appropriate action.’
Buyers are undeterred, with USD/JPY trading at a 30 year high this week, and EUR/JPY printing an all-time high.
The MoF will likely follow its verbal warning with action.
Nonetheless, the dip that this intervention catalyses will probably be bought given the juicy carry on offer.
The MoF did not deter dip-buyers in April and is unlikely to deter them with its next intervention.
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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.
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