With the yen weakening to levels not seen since last year, and the last time the BOJ intervened to buy yen and sell dollars the risk of intervention is back on. Japan’s top currency official has warned that the government would take action if needed in comments that follow a weakening of the yen to its lowest levels since last November. A Bank of Japan board member has hinted at the need to consider revising the yield curve control program, supporting the view among some economists that the bank may adjust its signature policy framework next meeting. That may be more a tilt towards verbal invention for now.
The Yen fell against the crosses and dollar this week with the carry trade in play. The IMM COT report showed the JPY short hit a 13-mth high in the latest report.
The yield curve control system being tweaked will effectively work as invention as it will tighten the spread between the US and Japanese rates. We saw the dramatic move last tweak. The future CPI rates will help the decision making to that end.
Where we sit now and what is key:
Japan’s consumer prices: Rose at a faster pace than expected in May while the deeper inflation trend continued to strengthen, outcomes that could fuel speculation the central bank will raise its inflation forecasts in July and even tweak its stimulus program. Prices excluding those for fresh food gained 3.2% from a year ago, decelerating from a 3.4% rise in April,
Bank of Japan (BOJ) board member Asahi Noguchi said ..” the central bank must maintain ultra-loose monetary policy to ensure wages, seen as key to driving inflation to its 2% target, continue to increase as a trend. Noguchi said core consumer inflation, which has remained above 2% for more than a year, will likely fall below that level around September or October as the effect of past rises in raw material costs dissipates… ‘What’s most important now is for the BOJ to maintain monetary easing and ensure budding signs of wage growth become a sustained, strong trend,’ he said…” June 22 – Reuters (Leika Kihara and Takahiko Wada)
Yield curve control program: “A Bank of Japan board member hinted at the need to consider revising the yield curve control program, supporting the view among some economists that the bank may adjust its signature policy framework next month. ‘Yield curve control seemed, in some aspects, to have hampered smooth financing and the bank could consider revising its conduct at this time; however, it was appropriate to wait and see a little longer in light of the situation in global financial markets,’ one of nine board members said, according to the minutes of the April policy meeting…” – June 20 – Bloomberg (Toru Fujioka):
It is important to look at the process of intervention in November last year.
“Japan’s currency interventions have been stealth operations in order to maximize the effects of its forays into the market, Finance Minister Shunichi Suzuki said…, after the government spent a record $43 billion supporting the yen last month. Bank of Japan Governor Haruhiko Kuroda, however, reiterated the central bank’s resolve to keep interest rates ultra-low, indicating that the yen’s broad downtrend could continue… ‘There are times when we announce intervention right after we do it and there are times when we don’t,’ Suzuki told a news conference… ‘We are doing this to maximise effects to smooth sharp currency fluctuations.’ The finance minister repeated his warning that authorities are closely watching market moves and will not tolerate ‘excessive currency moves driven by speculative trading’.”November 1 – Reuters (Tetsushi Kajimoto and Leika Kihara)
Back at the end of May Japan’s top currency official warned that the government would take action if needed in comments that follow a weakening of the yen to its lowest levels since last November. Bloomberg reported; ‘It’s important that currency markets reflect fundamentals and move in a stable manner. Excessive moves aren’t desirable,’ top currency official Masato Kanda told reporters after the first meeting of Japan’s Ministry of Finance, the Bank of Japan and Financial Services Agency since March. ‘The government will continue to closely monitor market moves, and will take appropriate responses if necessary.”
The impulsive leg higher earlier in 2022 came from The Bank of Japan reinforcing its commitment to low interest rates despite the rising inflation. The BoJ said it would purchase 10-year Japanese government bonds at a yield of 0.25% every business day to ensure that the yield doesn’t exceed that level. That sent the yen weakening to more than 130 to the dollar for the first time since April 2002.
The Market is Short Yen ….
The yen remains key for the overall currency matrix. We had a new BoJ coming in and YCC future tinkering will affect the dollar, Aussie and yuan. The yen had been the worst performing major currency in 2022, sliding against the US dollar but then corrected hard. Here we are though back at 9-month lows. Relative to a basket of trading partner currencies and adjusted for inflation, the yen fell to levels last seen before the 1985 Plaza Accord last year.
The new BOJ Governor:
In Japan persistent inflation and a change in leadership at the central bank are boosting expectations that the Bank of Japan (BoJ) could move away from its highly accommodative policy stance in the next few months.
Last year we saw the yen fell across the board after the Bank of Japan said it would maintain ultra-low interest rates as expected, and unanimously decided to make no changes to its yield curve control (YCC) policy. The Japanese currency plunged to its lowest since September 2008 against the euro, and its weakest level in seven weeks versus the dollar THE EURJPY rose 1.5% against the yen at 150 Friday.
The dramatic final moves last year on the yen stemmed from The Bank of Japan adjusting the central bank’s yield curve control program with saw yields rise sharply and a similar move in the yen. Dollar Yen went from 137.20 to 133.20 on the announcement. 10-year JGB yields surged to 0.455%, the highest since 2015 leading to a limit down halt on the Osaka Exchange.
The move followed the yen recovery picked after the softening of the November CPI prompted heavy selling in the US dollar and buying of bonds and a surge in US stocks. That led to a multi decade single day move lower of -3.5% in the USDJPY on the Thursday and another -2% Friday, losing 5.7% on the week”. Let’s be clear here, USDJPY was one of the most overcrowded trades with heavy BOJ intervention over the past few months. Intervention doesn’t always work, it’s a matter of timing and teamwork. Japan spent a record $42.8 billion on currency intervention in October to prop up the yen, the finance ministry said. Following the FOMC meeting the Yen was also the strongest currency in the rebound.
We now watch this move if it is correcting the move of last year and for another leg up or we are merely in an ABC correcting that peak.
Let’s revisit last’s years for levels. USDJPY power move was clinical, it pushed to a new high at levels last seen in 1998. Prices confirmed a breakout above 139.391, the previous 2022 peak from July. The move higher was fueled after it corrected to the weekly Tenkan at 125.88 which held and fueled a swift return higher and has rallied dramatically. USDJPY traded to 145.89 above the 78.6% Fibonacci extension at 140.636 and 100% level at 143.425. Above here was the 1998 peak at 147.65. Eventually the USDJPY topped out at 151.95.
Last year USDJPY spat 8/8 with a 151.95 high back to the Tenkan, energy has rebalanced since then. Chikou has not yet rebalanced on the up-move last week. Use your USDJPY Murrey grid for now. EURJPY & AUDJPY will determine risk on/off. The Tenkan is the natural balance of here.
The Reaction to no action at the BOJ
The major JPY crosses all had big upside moves last week after the BOJ meeting, pushed further by the BOJ kept rates and their yield curve control steady. The USDJPY rose 1.74%, but it is the other JPY crosses that are really on fire this week. USDJPY key support held at the the 50wma and MML’s. The move closing above the Tenkan three weeks ago powered the move.
EURJPY was up 3.51% the prior week and traded to the highest level since September 2008. The price moved above the swing high from May 1 at 151.61. The price has entered into the top-side extreme area that confined the pair from November 2006 to October 2008 between 151.71 and 169.968. The high Friday was 155.01.
GBPJPY was up 3.76% which is the largest weekly return since September 26, 2022 when the price moved up 3.896%. Before that, you’d have to go back to the week of June 1 2022 when the pair moved up 4.26%. The price is trading at the highest-level since December 2015. Going back to October 2014 the price for the pair traded between 174.88 and 195.88.
AUDJPY was up 3.7% which is the largest gain since March 2022 when the pair moved up 3.86%. AUDJPY is only trading at the highest level since September 2022. The high price then reached 98.599. The high price Friday 97.39. The September 2022 high was 98.599. Highs from 2014 at 102.844 and 2013 at 105.043 would be the next major targets.
Foreign Exchange Reserves
“Japanese foreign exchange reserves fell by a record amount in September and China’s dipped closer to $3tn as the surging dollar hit two of the world’s most significant pools of central bank assets. Japan’s foreign reserves dropped by a record $54bn to $1.24tn after authorities spent nearly $20bn last month to intervene in currency markets to stem the yen’s fall… Japan’s foreign reserves are at their lowest level since 2017, as markets resumed testing the yen’s ¥145 level against the US dollar. The foreign reserves of emerging markets in Asia have declined by more than $600bn in the past year, the biggest decline on record… FX reserves cover in months of imports has deteriorated ‘to the lowest level since the global financial crisis for [emerging markets] Asia-ex China,’ said Standard Chartered. ‘Against this backdrop, central banks may choose a more judicious use of FX reserves going forward.’”October 7 – Financial Times (Thomas Hale and Leo Lewis and Kana Inagaki)
It was a grim year for the yen, its worst year on record falling to 144.99 per dollar, a 24 year low, fueled by the selloff in Treasuries widening the yield gap between the US and Japan. It went another 5 yen from there.
Where it all started for the Yen
The BoJ has said Japan’s cyclical position with low core inflation and a more limited rebound in economic output warrants an easier monetary policy stance compared with its G10 peers. A strengthening dollar also tends to weigh heavily on emerging markets currencies, a rising dollar makes dollar-denominated debt more expensive for emerging nations to repay. The Bank of Japan chief Kuroda speaking at the G7 said BOJ will patiently continue with powerful easing announcing no change to monetary policy.
On the way up the price accelerated after the close above the Tenkan over 114 hence the pull for it to correct to the Tenkan which it did to ignite this rally a month ago. The Murrey Math level should remain massive support for dollar-yen. Any change will come from the weekly Kijun as it breaks through the old channel.
Yen weakness places Chinese manufactures at a competitive disadvantage, which has emboldened Beijing to play the currency devaluation card in an attempt to mitigate mounting economic woes and dumping of Chinese assets. Higher-yielding Chinese debt securities are losing their relative appeal (in a rising yield world), and now even the perceived stability of the Chinese currency is in question.
A slump of that to 150 may convince China to intervene in the currency market to protect its own flagging economy and it would be perfectly rational for it to do so, former Chief currency economist at Goldman Sachs Jim O’Neill said:
‘If the yen keeps weakening, China will see this as unfair competitive advantage so the parallels to the Asian Financial Crisis are perfectly obviously,’ ‘China would not want this devaluing of currencies to threaten their economy.’”
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From The TradersCommunity Research Desk