The FX Trader: JPY intervention. It’s for real.

The latest

Japan’s “top currency diplomat” sparks JPY rally on stern intervention warning. Atsushi Mimura was out early yesterday with the sternest warning yet on the intent to intervene against further JPY weakness. He not only called it a “final” warning, but said potential intervention is in line with a G7 agreement to notify counterparts, including the US when there is risk of excessive volatility. The move was well timed, coming just after USDJPY was allowed to slip well above 160.00 on the latest spike higher in crude oil price and global bond yields. From here, if the JPY is to reset significantly higher it will likely take more than rhetorical and even actual Ministry of Finance market intervention (something that may be happening as I am writing this update – see USDJPY chart below). The greatest support would be a loud signal from the US that it supports Japan’s efforts to support its currency. Also helpful would be a drop in global bond yields and a significant drop in crude oil prices on an opening of the Hormuz Strait, through which most of Japan’s imports have traditionally flowed.

ECB and BoE bring little new, but sterling outperforms. The ECB meeting brought no surprises as Lagarde and company guided for interest rate increases should higher energy prices continue to drive inflationary risks. There was an attempt at declaring no “pre-commitment” to a hike in June, but the market maintains its strong expectations for a June hike and for the ECB policy rate to rise nearly 75 basis points through the end of this year. The Bank of England sounded a more cautious tone on hiking the policy rate, with Governor Bailey saying the rate was in a “good place”. This dropped the probability of a June rate hike to about a 50/50 proposition rather than a near sure thing. Ironically, sterling rallied particularly sharply despite this dovish turn, with EURGBP pushing sharply lower and suddenly bringing the massive 0.8610 area support into view, a range low that has held since last summer.

The FOMC this week was more of a political development than a market one. At the margin, the three hawkish dissenters that wanted to remove the easing bias in the monetary policy statement was a hawkish surprise in the FOMC on Wednesday. This suggests that a Fed Chair Warsh will have to deal with a fractious FOMC if he intends to pursue a dovish path. Adding to that, Powell’s expressed intent to hang on to his Board position after he steps down as Fed Chair in two weeks appears an act of political defiance, aimed at defending the institution’s independence from Treasury. Powell’s staying blocks Trump appointing a deciding vote on the 7-member Federal Reserve Board of Governors. Historically, the Fed Chair resigns from the Board of Governors on stepping down. Inevitably, Treasury and Trump will win and the Fed is on the path to losing independence, but how difficult the process proves will provide plenty of suspense in the coming…three months, six months, year?

Chart focus: USDJPY
Note: just minutes before taking today’s chart snapshot, JPY was strengthening suddenly and brutally on no headlines – possibly intervention. The USDJPY volatility on Japan’s strong verbal intervention drove a significant move, but if we look at the level early Friday, we are not that much more than 1% lower from the middle of prior range. The technical situation is always fraught with the “artificial” presence of a significant actor (Japan’s MoF) that has an agenda to move the market. Still, at minimum, even if the yen fails to appreciate, it is difficult to see USDJPY being allowed to back up above 160.00 again from here unless the US explicitly turns its back on Japan, something that is unlikely, given the huge trade deal with Japan that includes significant inbound investment from Japan in key industries. To get JPY trending higher, we need either explicit US support for Japan’s effort to strengthen its currency or we need a sustained and large drop in oil prices and US treasury yields. Technically, we should watch whether the price action in USDJPY sticks lower rather than backfilling into the old range above 158.00. Next critical levels lower are the Ichimoku cloud levels that have not yet been taken out on the daily close – currently near 156.00, but rising slightly next week. Then there is the 61.8% retracement level of the rally near 155.30 and the psychological 155.00 level itself, possibly the last support ahead of the key 152.10 area low.