Thursday February 11, 2016 - 13:01:16 GMT
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Exclusive: Will the Bank of Japan Intervene in USDJPY?
With USDJPY having fallen over 8% to a low today at 110.97 vs. a 121.11 spike high set less than two weeks ago following the surprise BoJ decision to cut rates to negative, the market will be on high alert for any hints of intervention. In fact, USDJPY just spiked higher following reports that the BoJ was checking forex rates. By itself this means little as all central banks have access to electronic platforms so it is a warning in what will be a battle to keep USDJPY above 110. I would be surprised if the Japanese central bank was not already intervening covertly or through surrogates to try and offset some of the safe haven flows into the JPY.
In any case, expect the Bank of Japan (and Ministry of Finance) to start with verbal intervention and only after that shows diminishing returns resort to outright intervention if it fails to stabilize the currency. The problem the BoJ faces is twofold:
1) Unilateral fx intervention tends to have its greatest “shock” effect on the first salvo and then tends to have a diminishing impact each time it is repeated. Markets will pay more notice if intervention is coordinated with other central banks but recent history suggests that it is doubtful others would join in to weaken the JPY. In addition, intervention tends to have a limited affect if it is sterilized. This means a central bank drains the added supply caused by selling its currency, which negates the effects of the intervention.
2) The flows into the JPY have been driven by a rising global concerns and most likely repatriations, hedging of short JPY exposures and unwinding of carry trades. While speculative flows have also been a factor, it is not the driving force so intervention would only provide better levels for those who are looking to cover or hedge short JPY positions.
So the question is not if but how the Bank of Japan will intervene to slow the JPY from moving higher and USDJOY through the pivotal 110 level. As I noted, it is probably already acting covertly, Step two is verbal intervention and we have already seen the first signs of it with the checking rates reports. Thirdly, and the most risky is unilateral intervention given the history of diminishing returns each time it is repeated.
This sets up a cat and mouse game where the BoJ will try to restore a two-way risk by threatening to intervene but would have to engineer a move in USDJPY back above 115, the bottom of what had been essentially a 115-125 range over the past 15 months, to suggest it has put in a floor. Global risk aversion remains the wild card and unless equities stabilize, the BoJ will be fighting a rear guard action
Jay Meisler, co-founder
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