Japan intervention triggers 4 rise in USD JPY

The USD/JPY currency pair has experienced some strong movement recently, with a major intervention from the Bank of Japan again this morning in an attempt to curb yen’s rise against the US dollar. City Index analysts give their opinion on what this means for the currency pair in the coming months. 

31/10/2011 (12.35pm)

A second major intervention by the Bank of Japan to prevent its yen currency from strengthening too much took place in the early hours of Monday, forcing the dollar to strengthen as much as 4% against the yen and lifting the exchange rate back from a post WW2 yen high of Y75.55.

The Japanese Finance Ministry had been sending clear warnings signs to the markets over the last fortnight that intervention was imminent and it appears that last week’s yen strength was enough to trigger them into action this week.

 Japan has being attempting to get to grips with the strong yen for much of the past year, as a strong yen is a sincere threat to Japanese exports, making it more expensive for non-yen holders to purchase goods from and within the region, hurting manufacturing in a export driven economy.

The full scale of the intervention on Monday is unknown but it is thought to have exceeded Augusts’ intervention size of 4.5 trillion yen to potentially be as large as 6 trillion yen.

The chart below shows the USD/JPY rate

Joshua Raymond, Chief Market Strategist (12.35pm)

The move by the Bank of Japan had been long expected in the market, with speculators setting up long ‘buy’ positions to try and ride any intervention type wave higher. That wave came this morning and early indications are that the scale was larger than the August 4 move by the BoJ.

One aspect to take from the move is that the finance ministry in Japan is clearly concerned by the yen strength and today’s move, particularly the speculated scale, is impressive and shows a determination that many had felt Japan’s previous actions had lacked to weaken the yen.

That said, will today’s intervention be enough to stop the yen from rallying to a new post WW2 high against the dollar? In the long run it’s hard to argue this. First and foremost historical evidence has proven that intervention does not work in the long run. Unless there is a similar peg to that of the Swiss franc against the euro, the market dictates the cross rate and one doubts that Japan has the resolve or the firepower to peg the yen against the dollar. Moreover, there is likely to be a requirement for multiple stages of intervention to prevent the yen from strengthening and multiple action can easily be perceived as ‘currency manipulation’, which is prohibited under the G7 treaties.

The fact that the USD/JPY rate has since receded from the day’s post intervention highs of Y79.51 shows that many in the market remain unconvinced that this new phase of intervention will work in the long run. Certainly it is unlikely that today’s action marks the end of currency intervention by the BoJ, but rather a continuation of a long running battle that appears to have no end as of yet.

Sandy Jadeja, Chief Technical Analyst (2pm)

The USD/JPY pair has broken above an eight-week high of 77.85, creating a large swing volatility breakout. Typically these types of range expansion moves tend to follow through over the given time period.

In this case the next few weeks could see further above-average range moves. The current move after the Japanese intervention has also created a Bullish Engulfing Weekly Bar.

On the short term horizon the currency pair will need to maintain a stance above 75.50 but may see a pullback lower towards 76.80- 76.40 to create a higher low. On a momentum basis USD/JPY has provided a Stochastic Crossover on a daily basis. This confirms that the coming week is likely to provide a bullish case for the US dollar and help lift the pair towards 80.50 and 81.70 as upside targets.

Neil Looker, Chief Dealer, Forex (7pm)

Last week the BoJ announced that it was expanding its asset purchase programme by JPY5 trillion to JPY55 trillion but the market apparently viewed this as insufficient to weaken the yen. So when the CME’s International Monetary Market released its figures at the close of business on Friday that the non-commercial long JPY positions has risen to levels close to where the BoJ had last intervened in August, it was just the ‘speculative market’ that the Japanese Finance Minister had warned he would punish.

I am quite surprised myself as I thought the BoJ would wait until after the FOMC meeting where a discussion on QE3 in the US is likely to be mentioned along with this week’s G20 summit and the US jobs data. The last thing the BoJ will want to see is history repeating itself when they intervened in huge sizes in August only to see the fundamentals turn against them and the JPY level return to where they stepped in just three days earlier.

Monday’s intervention commenced around 10.30am (Tokyo time) and within the usual time frame for the BoJ to act (just after the fix) bids were seen in the market for around $1.5 billion at a time. Once 79.20 was achieved the bids were replenished at this level every time, leading the Asian market to believe that the BoJ was going to establish a SNB type floor the JPY, but as Europe walked into a 4% rally this theory diminished as Japan’s global trading partners make this type of action impossible to carry out.

The volume of the action taken by the BoJ is still not known but the markets are looking to take them on as we slide lower all day, just breaking through 78.00. The BoJ really have to continue to come to the market or they will lose credibility. The fact that they are acting alone gives the market confidence so a move above 80.25 is most certainly needed or the JPY strength will continue.