Head of FX Strategy
Summary: Intervention threat for Japanese yen has stepped up after a trilateral meeting between Japan, South Korea and US officials and a G7 statement suggesting that the US could be tolerant of an intervention. There is reason to believe that Japanese officials could be more vigilant to defend the 155 handle in USDJPY, and a slowing pace of USD gains along with a BOJ meeting next week could also make an intervention more effective.
Japanese yen has been on intervention alert for some weeks as USDJPY rose above the key 152 level on April 10 and breached 154 on April 15. The resilience in the US economy, sticky inflation and a pushback from Fed members saw US yields rushing to fresh highs, and that weighed on the yen.
However, only verbal intervention came through from Japanese authorities. This made complete sense because an actual intervention could have been futile in the rising US yield environment. While a knee-jerk reaction could have brought USDJPY back towards 150, the wide and increasing yield differential between the US and Japan could have reversed that move quickly.
But there is reason to believe that intervention threat has stepped up now and officials may be looking to defend the 155 handle, because:
While the stepped-up warnings may again be about buying time, there seem to be clear indications that Japanese authorities will try to defend the 155 handle in USDJPY. Any yen intervention could bring USDJPY to test 150. Such a move could also pause the rally in Japanese equities.
Also, worth watching CNHJPY where a break above 21 has been a concern for Chinese authorities, as discussed in this article. When a negative carry is prohibitive to position for yen strength against high-yielding currencies, traders can consider at CHFJPY where the interest rate differentials are less stark.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
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