JPY: Intervention alert, again!
Traders have remained extremely wary of the 150 level in USDJPY which is seen as the psychological level for the Japanese authorities to intervene. As such, despite abundant volatility in yields amid Fed message, Mideast crisis and US deficit concerns, USDJPY has remained steady just below the 150-mark this week. Now with 10-year yields near 5%, can temptation for USDJPY to back above 150 may be high, but intervention risks continue to dissuade speculators. We have had some jawboning from officials yesterday and today.
Japan September CPI was out this morning and was as expected on the headline, coming in at 3.0% YoY from 3.2% previously, but core and supercore measures beat estimates. Core inflation was at 2.8% YoY in September, softer than August’s 3.1% but a notch higher than 2.7% expected, while core-core measure was at 4.2% YoY vs. 4.1% expected and 4.3% prior. While price pressures may be easing, inflation remains above 2% BOJ target and risks from geopolitical escalations amid tight energy markets could mean more threats of inflation. BOJ is expected to revise its inflation forecasts for this year and next higher at the October 31 meeting. If next year’s core inflation forecast is revised to 2% or more, that would mean three consecutive years of above-target inflation in Japan – could it still be called transitory?
It remains to be seen how BOJ Governor Ueda weighs the above-target inflation vs. current disinflationary trends in deciding policy direction, given Japan’s largest labor union federation is also demanding higher pay increases for next year and the government is weighing a stimulus package to support demand.
USDJPY continues to face further upside risks, absent intervention threats. JGB 10-year yields are also being pushed higher due to the steepening Treasury move, but the upswing continues to fade in comparison to the move higher to ~5% in 10-year Treasuries and that could pressure yen further.
Market Takeaway: USDJPY remains a buy on dips, with eyes on the psychological 150 barrier, with further potential for upside in 10-year US Treasury yields.