FX Update: JPY intervention effects have a short half-life.

FX Trading focus: The half-life of JPY intervention is short

A bout of apparent intervention materialized Friday after a further acceleration to the upside in USDJPY to almost 152.00, as that move coincided with the latest aggravated rise in US treasury yields and after the initial break of 150.00 failed to spark intervention as many though it would. The USDJPY move took the USD down several notches elsewhere as well, as treasury yields also retreated and risk sentiment improved suddenly. Overnight, another apparent round of intervention took the price action back below 146.00 briefly before the exchange rate rebounded above 149.00, or about where it was trading last Wednesday. As with the prior round of intervention when USDJPY was bid up above 145.00, it seems the half-life of the impact from intervention is very short indeed.

Elsewhere, sterling has tried to muster a rally on what looks to be a quick path for Rishi Sunak to become the next UK prime minister already this afternoon. From here, the Bank of England and the (presumably) Sunak-led government will follow the fiscal austerity script to avoid the kind of market melt-down we saw in the wake of the Kwarteng “mini-budget”, but that doesn’t mean we should expect a substantial sterling rally. Tight fiscal policy is normally a currency negative and will aggravate the worsening of the UK’s economic outlook, meaning that the Bank of England will be that much more reluctant to take yields as high as the market is currently pricing they will (which will in turn likely weigh on the currency in the medium term.) The market has priced the BoE to reach a  5.00% policy rate by the May meeting next year. Both of the flash October PMI’s for the UK surprised on the negative side, with Manufacturing at 45.8 vs. 48.9 on Sep, and Services at 47.5 vs. 50.0 in Sep.

Chart: USDJPY
USDJPY some apparent further intervention that briefly took USDJPY below 146.00 overnight, we have already rebounded to levels that traded as recently as mid-last week. From here, we might expect to see some bottled up price action if we re-approach the 152.00 area as the market knows that intervention will arrive again at some point – although a “learned behaviour” from prior experience might be that intervention will only arrive in force again at some higher level – perhaps 160.00? Just as long as it takes a bit of time to get there… the BoJ/MoF have argued that JPY levels are less material than whether the currency is falling at an “excessive” pace. In the meantime, only a material retreat in US treasury yields below, for example, that key 4.00% level in the 10-year US yield benchmark can bring some offsetting support for the JPY. Unlike the last time the Bank of Japan intervened in markets, it has been noted, they are playing coy on whether intervention has taken place and are willing to do it outside of Japanese trading hours, clearly taking aim at foreign speculation in JPY weakness. The Bank of Japan meets this Friday.