USD/JPY: A turnaround backed by political support

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  Christian Ingerl
  Redaktor

On the foreign exchange market, Tokyo and Washington recently sent an unmistakable signal: the yen’s years-long decline will no longer be tolerated passively. Japan and the U.S. confirmed a coordinated intervention to buy the yen—the first joint action of this kind since 2011. The effect was correspondingly significant. After the U.S. dollar had risen to near JPY 164 at the end of July—its highest level in about 40 years—it plummeted USD/JPY plummeted at times to as low as JPY 155.20 within just a few trading days.

Shopping Frenzy

Formally, the intervention was carried out by the Japanese Ministry of Finance in conjunction with its U.S. counterpart. The Bank of Japan (BoJ) nevertheless plays a central role: It executes the transactions on behalf of the government and provides indications of the volume through its balance sheet data. According to this data, Japan may have purchased up to USD 58.97 billion worth of yen even before the joint intervention with the U.S. confirmed on Friday. At the same time, both countries signaled the possibility of further coordinated interventions. This threat accelerated the unwinding of extensive speculation on a weaker yen and further amplified the movement.

The reasons for the intervention are easy to understand: The weak yen makes energy, commodities, and other imports more expensive. This fuels inflation, erodes household purchasing power, and increases political pressure on the government. In addition, the sharp declines in the value of the yen and Japanese government bonds had increased the risk of major disruptions in international capital markets. Rising yields on Japanese bonds can redirect capital flows from the U.S. back to Japan, thereby exerting additional upward pressure on U.S. Treasury yields. Therefore, Washington also has an interest in maintaining stability. An extremely weak yen improves the price competitiveness of Japanese exporters and can offset some of the tariffs imposed by the U.S. At the same time, the goal is to prevent Japan from selling large holdings of U.S. Treasury bonds to finance further interventions. With holdings of USD 1.14 trillion, Japan is the largest foreign creditor of the U.S.

Keeping an Eye on Interest Rates

However, the intervention alone does not eliminate the structural causes of the yen’s weakness. Above all, the interest rate differential between Japan and the U.S. remains a key factor. Although the BoJ has gradually tightened its monetary policy and raised its key interest rate in June to a 31-year high of one percent, By international standards, however, interest rates remain low. As a result, it remained attractive for investors to borrow cheaply in yen and reallocate capital to higher-yielding investments.

Now, however, the likelihood of another rate hike is increasing. The BoJ recently signaled that a hike could be possible as early as its September meeting. The bond market is increasingly pricing in this scenario: The yield on two-year Japanese government bonds briefly reached its highest level since 1995. A tighter monetary policy would fundamentally support the interventions and could prevent USD/JPY from rebounding rapidly. However, the markets currently also expect the Fed to tighten monetary policy in September as well. This means the monetary policy landscape remains dynamic.

At the 200-day moving average

From a technical analysis perspective, the picture has changed significantly following the intervention. The dollar has fallen sharply against the yen, breaking below the rising 100-day moving average. Now, the 200-day moving average—which is also trending upward—is taking center stage. The average visible on the chart runs roughly between JPY 155 and 156 and is thus being tested immediately. If this zone holds, USD/JPY could initially start a technical pullback. A sustained closing price below the 200-day moving average, on the other hand, would suggest a deeper correction. In that case, the 52-week low at JPY 145.50 would also come back into focus in the medium term.

Investment solutions

The combination of actual market interventions, the threat of further interventions, and the prospect of a tighter BoJ policy suggests that the correction in USD/JPY could continue for a while longer. Those who want to bet that the yen’s weakness is over for now can trade the Short Minuit Future MUSAJV from Bank Vontobel to leverage a bet on the trend continuing. The product has a multiplier of 14.7, and the knock-out level is JPY 166.37—about 5.7% from the current level.

However, the overarching upward trend in the dollar may not yet be permanently broken. If the interest rate differential remains wide or the threat of intervention loses its impact, a return to rising USD/JPY rates is entirely conceivable. Investors can capitalize on this scenario with long derivatives. The security ACQTBP from BNP Paribas provides 10.1x leverage on the movements of the currency pair; the stop-loss level is set at JPY 144.7404, which is 8.1% away.