Can USD/JPY Extend Its Decline After BoJ Intervention?

Welcome to the MUFG Global Markets FX Week Ahead podcast with Derek Halperny, Head of Research, Global Markets, EMEA and International Securities. It's Friday 1st May 2026 and joining Derek to pose some questions on the financial market themes for the week ahead is Simon Mayes, Head of UK, Ireland and Swiss FX Corporate Sales. This material is only intended for professional investors in jurisdictions in which its use is permitted under applicable laws, rules and regulations.

It has been produced for information purposes only and should not be construed as investment research or advice. MUFG EMEA disclaimers and disclosures can be located on our website. Hi, Derek.

Certainly lots and lots to talk about this week. Indeed. It's been a very, very busy week.

Indeed. Afternoon. Nearly there, nearly into the long weekend.

So after a busy week, indeed. Gazing adoringly at the weather. Obviously, lots of central bank action this week.

We'll probably get to that in a minute. But I wanted to start, if I may, with what was the main focus yesterday, the big dolly end moves. Obviously, we're going to talk about intervention.

It's something we've seen before in the last few years. But this time around, given that the backdrop is slightly different this time, it seems that yen short positions are probably less than maybe half the size they were back in 2024 when we saw the successful intervention. Then the backdrop, we've got global yields rising rather than falling this time.

I mean, how long do you think the Ministry of Finance's action could keep dolly in below 160, which seems to be sort of the magic level at the moment, especially with golden week holidays limiting liquidity next week. And of course, the Middle East tensions still potentially driving energy prices higher. Yeah.

I think definitely the backdrop for this intervention, which it looks like now we probably won't get confirmation until we get the data at the end of the month. But BOJ estimates in terms of current account changes could be, according to Bloomberg, around 5 trillion yen, which looking back at interventions from 2024, that would actually be similar to the intervention that took place nearly exactly a year ago, the 29th of April, when we broke through 160 in 2024. That was nearly 6 trillion.

And then there was further intervention on the 1st of May 2024. But to your point, when you look back at that intervention, April, May 2024, larger than the intervention that followed, considerably larger, not too far off, double the size, it had far less success than the intervention in July of 2024. And one of the differences was that the front end of the US yield curve after the April, May intervention was relatively stable in or around 5%.

We range traded between four and three quarters of 5%. And it was only really in July after an equity market correction of around 10% in US equities. We had the July BOJ rate hike.

We had a big drop in yields. Then dollar yen moved ultimately by 20 big figures. But the April, May movement was about eight big figures.

And then it retraced and we were back into intervention zone by the end of May 2024. So fundamentals are massively important. And yeah, I'd have to say sitting here right now, obviously, we don't know exactly what's going to pan out in terms of crude oil prices, and therefore potentially yields outside of Japan, but basically yields outside of Japan have been rising.

And that goes very much against any kind of sustained move stronger for the yen. So my hunch is this was really about buying time. Obviously, the BOJ didn't raise rates this week, they had been expected to about a month ago, and we were up at about 18, 20 basis points expectation.

So they, you know, relative to a month ago, were the point of the markets. And then of course, the Fed was a bit more hawkish this week, and we're going into a golden week holiday. So I think just on the back of that, they thought if we if we had left north of 160, then, you know, you could easily see two, three big figures very quickly.

And then that kind of feeds into instability in JGB. So it's buying time. Politically, it helps.

Obviously, the cost of living is an issue in Japan. So at least they're seen to be acting to try and reduce the energy impact by strengthening the yen. So I think politically, it helps.

And ultimately, it's about trying to get maybe to the next meeting without any kind of big moves in dollar yen. But you know, if the bigger picture is that yields in the US are to continue to grind higher, and you know, we start to see a scenario, obviously, we'll talk about it maybe in a minute in terms of the Bank of England and the ECB. But you know, rates are going to go higher.

And in that context, the BOJ needs to get involved. And it needs to be part of that to at least allow for some potential for a fundamental backdrop that could be more favourable for the end. So yeah, I think buying time for that.

Yeah, that's, yeah, let's move on to the central banks there. Maybe we'll tackle it in order that they came in the weeks to start with the Fed. So the Fed remained on pause, hawkish undertones, despite weak US GDP data.

But it's an interesting time and obviously, Walsh is going to inherit a Fed that's quite unlike, you know, what we've seen in the past as divided committee, there's external political pressure, energy shock. So when he when he hosts his first meeting in June, he's going to face this dilemma of either staring down the White House demands that you know, we've heard Trump being so vocal about for immediate rate cuts or going against his fellow policymakers who are sceptical of easing. And of course, you've got Powell staying on as well, as you know, as a voting member.

So how do you how do you see him navigating this scenario? It's going to be very difficult for him. Yeah, like I think his nomination hearing was quite interesting.

You know, he seemed to be trying to give the impression of embracing a kind of a fundamental change to monetary policy framework. So doesn't like forward guidance. So let's assume we're going to get less of that, embraces division and welcomes it.

And of course, given the vote, the dissents that we had this week, I think we're definitely going to have continued division in the central bank going forward. And then, of course, very much pushing on changes to the size of the balance sheet and mentioned the potential for new metrics on inflation. So you've got all of this in in the mix.

And you've got to your takeaway has to be that we need to expect potentially higher volatility in relation to Fed policy going forward. And all of these changes and investors getting used to it and the uncertainty that all of that brings, you've got to you've got to assume some degree of added risk premia going forward. I think from an FX perspective, that to me points to to US dollar weakness.

So, you know, you can talk about near term dynamics and what happens to front end rates and do they cut, do they not cut? But I think bigger picture and I'm talking next couple of years. And of course, as you know, Simon, we're we're kind of dollar bearish.

I think we're in a kind of a bear trend after one of the after the longest dollar bull trend that we had up to the peak in 2022. So this, to me, just reinforces our view that with this all taking place now, it certainly reinforces, we think, the prospect of further dollar weakness going forward. Okay.

Do you foresee, you know, this Fed remaining on hold or potentially cutting in the next few months? And if so, you know, how do you how do you think they can maintain that stance with the ECB and Bank of England potentially moving towards hikes? Does policy divergence play into this or or is it not really that relevant?

Yeah, like I think policy divergence is definitely an underlying factor that I think comes back like correlations between FX and rate spreads. It's actually weakening at the moment, which when you get this kind of macro shock or external shock, I should say that that does tend to happen. So it's not hugely surprising.

But I think going forward, you know, on a de-escalation, whenever that happens, we start to see the focus move away from energy and less concerns about that. I think we're still going to have that divergence because, you know, if the Bank of England and the ECB are hiking, well, then maybe the Fed are on hold. If we get rapid de-escalation, which is really looking less likely, but if we did, and it then managed, it was possible for the ECB and the Bank of England not to hike, which again seems unlikely, I think, the Fed would be quicker to cut.

So I think you're always going to have that expectation of the Fed having a greater willingness to look through the energy related risks and respond accordingly. So if you get a quick de-escalation, I would still say that the Fed can cut this year. But obviously, if it drags beyond Q2, which is becoming a risk, then I think it becomes more difficult.

But then they're on hold. I don't think they'll be rushing to hike. And you still have that divergence that I spoke about.

And despite divergence as well between the Bank of England and ECB, you know, ECB were slightly more explicit in regarding guidance for a hike in June. Bank of England, not quite so explicit, only Hugh Pill dissenting. Markets are pricing, I think, just over 50% or slightly more than that probability for a June hike in the UK.

Yeah. Is there anything that you think, you know, any specific data points or oil price levels perhaps between now and the June 19th meeting that you could see shifting that? And what's your view on the June?

Did you think we're going to hike? Yeah. I think when you look at scenarios like this is the Bank of England, you know, they gave these three scenarios, A, B, and C.

A was basically crude oil prices following the futures curve. B was prices coming down slower than the curve implies. And C was staying elevated for much longer.

So B is where most centred on, which is roughly our assumptions in terms of our forecasts. But on that, they gave an implied, it wasn't a guidance in terms of what the Bank of England would necessarily do in terms of monetary policy. But in terms of showing you what then happens to inflation, incorporated into that was about 60 basis points of hikes.

So between two to three around the scenario that most of them are focused on. And of course, the curve, the OAS curve of the UK is around 65 basis points. So that seems to be where the market is as well.

And I think that along with the 8-1 vote that you mentioned, and nothing explicit about June kept the market from, I think, pushing for aggressively pricing a June move. But again, if crude oil, I think, stays up at these levels, we still think that the MPC will come around to- That's enough. Yeah.

Yeah. Like if, you know, Hugh Pill has spoken today, okay, he's the one who voted for a hike. So he's obviously the most hawkish.

But, you know, he kept saying, we're not passive. You know, we're actively looking at what needs to be done. And he's very much against kind of sitting back and waiting.

So I think he can, he's the chief economist, of course, so he should have more sway in terms of the others. And all of the others were open to hikes. And I think if we're still in the same situation as we're in today, why wouldn't you go in June, especially when the ECB are going, although there's a weak difference between the two meetings.

But yeah, as you said, Lagarde, I think, was much more explicit. Yes. So that's nearly fully priced.

Yeah, this is what I was going to, you know, what she mentioned yesterday, she said they debated it at length and in depth for June hike and said six weeks would provide time to make an informed decision. Do you see it effectively as a pre-commitment to a June rate increase or is there still genuine conditionality tied to energy prices and inflation data? Well, there is, I guess the conditionality is going back to what I said a moment ago, which seems quite unlikely, which is a pretty sharpish drop.

Now, of course, as we speak here right now, crude, before we come in, crude oil is coming down, it's 108 Brent. So, you know, again, you get to a weekend and there's all this hope and optimism about a deal being done. And of course, that there's this story that Iran has given back a proposal based on what the US has proposed.

So some dialogue is still ongoing, but I don't know, I find it difficult to see a near term sustained de-escalation. And the longer we stay in this kind of status quo or gridlock on the state of our house, the greater the risk is that the US may feel escalating back into military action to kind of push to get out of this scenario is a greater risk. Yeah, that then I think would obviously complicate the consensus view of a quick de-escalation.

Yeah. Okay. And I know the ECB are obviously coming from a more neutral sort of territory than perhaps the Bank of England, which is slightly more restrictive already.

But looking at bonds, you know, looking at maybe the peripheral bond spreads in Europe, Italian, Spanish, Greek bond spreads. How are they reacting to the hiking expectations from the ECB? Is there any concern about their sustainability if they tighten aggressively with energy costs remaining so elevated?

Yeah. No, like I certainly general resilience and stability from that kind of single currency perspective. So I certainly wouldn't envisage too much of that just based on an inflation shock.

Of course, this shock would be far less than the one we had in 2022. And yeah, you know, if anything, I think, as I've said before, and what we've written about, each and every time there's a crisis in Europe, we get a response that kind of brings together and tightens the single currency block. EU bond issuance via the NGEU after COVID.

And I think the next step now is going to be military spending and the need for defence spending to pick up notably. And of course, balance sheet capacity for governments in Europe is pretty limited. So I think the most obvious avenue for increasing spending is via the issuance of more EU bonds.

And again, that will require political coordination. And if anything, I think, again, brings Europe closer together, especially given the way in which Trump is treating Europe at the moment, it kind of incentivises them to do exactly that. So I think, you know, in terms of the single currency, it's, to me, it's, it looks, it looks pretty resilient and strong at the moment.

Yeah. Finally, before you go and enjoy the sunshine for the weekend, monthly publication is coming out around now. We'll have our FX forecast in.

Is there anything in particular you should look out for? Any major changes? Or is it still the same sort of core thesis?

Yeah, the general forecast, you know, we haven't, we haven't changed anything. Because when we updated our forecast, it was based on the assumption that crude oil prices would remain elevated in Q2. We'd start to see de-escalation beyond that.

Second half of the year is when you'd see energy prices come down. So there was no real need to change the FX view. Although, of course, the dollar was a little bit weaker than we had anticipated in the month of April.

The changes really were, in terms of which we've mentioned in the daily today is the Bank of England. Originally, we had one hike, I think, after yesterday's communications, even though front end deals came down a little bit, it looks more plausible that they will raise rates on two occasions. So we've, we've added a second hike from the Bank of England.

And we've kept the two hikes from the ECB. Thank you very much, Terry. Okay.

Thanks, Simon. Have a good weekend. Cheers.

Cheers. Thank you for listening to this MUFG Global Markets podcast. Rate, review and subscribe.

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