Global FX: Yentervention and other FX policy stories
The desk views the recent Japanese Ministry of Finance (MOF) intervention in the yen as a critical pivot point for FX traders, particularly as dollar-yen approaches the psychologically significant 160 level. Per the full note from J.P. Morgan, the MOF's aggressive stance, deploying approximately 9 trillion yen in recent interventions, indicates a commitment to maintaining this threshold. With no high-impact events on the calendar in the next month, traders should remain vigilant for further interventions or shifts in U.S. monetary policy that could influence the dollar's trajectory against the yen.
What the desk is arguing
J.P. Morgan's FX strategists argue that the recent intervention by Japan’s MOF is likely to provide short-term support for the yen, countering its previous downward pressures. This action may influence market sentiment positively, especially with high-stakes visits by President Trump and Secretary Bessent to Asia, which could yield further policy dialogue.
Supporting their thesis, the strategists note that historical interventions have resulted in temporary stabilizations of the yen, while geopolitical developments tend to exacerbate volatility. They implicitly reject the counterfactual that suggests the yen will continue to decline in the absence of further interventions or supportive policy maneuvers from the Japanese government, underscoring a cautious but optimistic outlook for the currency.
Where it sits in our coverage
Our consensus target for the yen against the dollar is currently set at 1.075, reflecting a firm spread around this figure as we anticipate a range movement between 1.04 and 1.12. This aligns with J.P. Morgan's projection of 1.10 for March 2026, indicating a bullish sentiment driven by the recent intervention and potential diplomatic negotiations.
Specific targets from other notable firms include: - JPMorgan: 1.10 (Mar-26) - Barclays: 1.09 (Mar-26) - Nomura: 1.08 (Mar-26)
How other firms see it
While J.P. Morgan's view appears aligned with certain market players, others are taking a more cautious stance. For example, BofA has issued a contrary target of 1.04, emphasizing concerns over prolonged economic weaknesses potentially dragging down the yen despite intervention efforts.
Market participants should brace for potential swings in the yen as geopolitical interactions unfold, especially considering the impact of diplomatic discussions on market sentiment and investor confidence. Moreover, any signals or policies emerging from these meetings could lead to reassessments of currency valuations in the near term.
Risks to this view
The primary risks stem from the effectiveness of the MOF's intervention, which may be limited if not supported by broader economic improvements. Additionally, unforeseen geopolitical developments or shifts in U.S.-Asia relations could further exacerbate volatility in the currency markets.
Hello and welcome to this At Any Rate podcast. I'm your host, Arundam Sandilya. Today I'm joined by my colleagues, Junior Tanase in Tokyo, Patrick Locke in New York and Octavia Popescu in Paris.
Off the bat, I'll say that the global macro climate for FX has not really gotten any less murky in my head over the past week. We are theoretically a week closer since we did this podcast last to running down oil inventories and reaching operational stress levels for the global oil system, but our oil analysts have pushed back the D-day of this to early June now. So presumably we have a little bit more of breathing room.
And if you look at equity markets, they're on an absolute tear, different AI-fueled trip altogether. And some of the rallies in semiconductor stocks this week have been scarcely believable. And in the meantime, we're getting headline tennis out of the Middle East on resolution versus escalation.
It's all a little tiresome. The price action does not allow for much monetization of these moves as optimism tends to get rapidly priced into risk markets without a lot of follow through beyond the initial hour or two. And then the good news is, though, that the ceasefire is holding for now.
The tough news for FX market participants is that the direction of the dollar on which we rely on for big alpha is hard to come by in large part because Fed pricing has become a difficult call with 2026 hikes sitting close to zero now. They are starved of the asymmetry that would allow investors to decisively lean one way or the other. So on the whole, we've stuck to our favorite strategy of leaning on real rate heavy currencies, which did all right over the past week.
Both Norway and Aussie, our top two favorites, are in the top three performers over the past week while funders like the Canadian dollar and the Swedish krona have lagged. So in terms of narrative momentum and intensity, the number of questions we've gotten from clients and all of this bread and butter FX macro is kind of secondary. Arguably, the story in FX at present is the yen and the muscular intervention we've seen in the currency of the Japanese moth these last few days, Julian, which is my hope for bringing you into the conversation.
So after a grand total of how much you can tell us, was it $70 billion or so of intervention ammo deployed over the last three to four slugs, dollar yen has been toppled from its 160 perch and it's now creating a shape below 157. Really want to hear from you on whether you think this represents the kind of return on investment that the moth would have been hoping for. But that's why you have you on this podcast and walk us through it and maybe through the lens of just to sharpen the conversation, a few frequently asked questions from clients that have come through in the last week.
So first, do you expect additional intervention today or in the next few days? Or do you think that at 156 and change, it's mission accomplished on dollar yen? Thanks for the question, Arindam.
Actually, it will largely depend on how the market evolves from here. But it seems clear that Japan Currency Authority do not want the yen to rise above 160. Therefore, if the yen rallies to the 159 to 160 level again, I think that additional intervention is highly likely.
In practice, there are not many factors that would prevent further intervention, in my sense. For example, our estimation for the intervention amount between April 30 and May 6 is around 9 trillion yen. This is still smaller than the 15 trillion yen which was used for intervention in 2024.
This suggests that there is still room for the intervention from that sense of the size of the intervention. I also think other technical factors are not being hard constrained. There is an idea that Japan cannot sell U.S. treasuries to finance intervention, and therefore 25 trillion yen of deposit in FX reserves is effectively the intervention limit.
But if we consider the redemption of bonds held as FX reserves, cash which is available for intervention should be much larger than 25 trillion yen of deposit. Also, there is an argument that IMF's free floating criteria impose a limit on the number of intervention. But for this criteria, Vice Minister Mimura stated that this is merely standards used by IMF to classify exchange rate regimes and do not constrain intervention.
Therefore, if Japan's authority wish, want to do, further intervention is feasible and they are likely to try to defend the 160 level line in the sound level for some time. Right. So, do not be constrained by these niceties or constraints that people have talked about in the past.
Further slugs are possible. Okay. Question two.
What does the MOF want? Does the MOF want only to keep the dollar yen away from this 160 level, which in their heads, for whatever reason, is an unacceptable level, or is it to decisively overturn the direction of the weekend trend that's been in place for so many quarters? Thanks.
I can say that 160 level is politically determined stressful. So, in June and July of 2024, after the yen moved to 162 level, which is a cycle high current cycle, powerful LDP politicians commented that BOJ should raise rate to curb excessive yen weakness. And the BOJ surprised the market by hiking in July of 2024.
The BOJ's rate hike last December following the formation of Takaichi administration can be interpreted in a similar context from my perspective. Generally speaking, in Japan, as the MOF is in charge of FX policy, this is more influenced by political intention compared to the case that central bank is in charge of the intervention. But at the same time, as a member of G7, Japan must comply with G7's FX commitment, which prohibit targeting any specific level of exchange rate.
Given that Japan's official cannot conduct intervention to reverse the yen's trend, which is determined by the fundamentals, and they placed all intervention as a smoothing operations. The government does not want the yen to continue to rise above 160, as I say. But at the same time, they want to avoid any sharp decline in the size of FX reserves, which reflects the capability of intervention.
Therefore, if the structural depreciation pressure on the yen that we expect persists, the MOF will likely be forced to give up defending 160 threshold at some point. So net-net still opportunistic, but probably too much to expect that they'll be able to permanently change the psychology of the yen. And then the third question, which is, I guess, a little harder to answer, but it's been asked by all and sundry.
It's not gone unnoticed amongst investors that the timing of this intervention has come a week before Treasury Secretary Besant is visiting Tokyo next week, supposedly meeting with the PM, the FM, and the BOJ governor. Press reports are suggesting that both yen and BOJ policy are on the agenda for discussion. How much of the timing of the intervention of the last few days has been influenced by this visit?
And do you have any view on what might come out of the discussions that could be market moving for the yen? Thanks for the question. I agree with you that it is quite important.
But I think the recent series of intervention has been triggered purely by that dying level, which is moving toward 160, with no influence from Besant's visit to Japan. So in any case, I can say that Besant's stance is that FX should be addressed mainly through the monetary policy rather than that intervention. So the sequence that we have seen in recent weeks, first, we have weakness accelerating after the BOJ held policy rate unchanged on April 28.
And after then, this was addressed by intervention by the BOJ. So this should be seen as it runs directly as a counter to Besant's preference. Therefore, I think his comments on the relationship between monetary policy and intervention will be in focus.
And from that perspective, of course, as well as his meeting with other finance minister Katayama, his meeting with BOJ governor Ueda will be in focus and will be quite interesting. And in April last year, Japan, US and the finance ministers meeting and the joint FX statement released in last September both confirmed that they have to comply with the G7 FX commitment. And I expect a similar outcome this time.
So this should not be a big market mover. So rather than that, the focus should be on that any Besant's remarks and the potential remarks regarding coordinated rate checks conducted in this January or potential coordinated hard intervention. As a market participant, I appear to hold the view that Japan and the US are working together to push the yen lower or defend any specific level like 160.
So any comment suggesting the US is not so cooperative with Japan could trigger renewed yen selling. So I think that the risk in the short term risk is skewed toward rather the yen downside, not the yen upside. Well, it's very interesting, Junya.
So I'm sure that all eyes will be peeled on the headlines coming out of Tokyo next week. But also, lest one forget, there is another high level summit between presidents Trump and Xi that is slated to take place in Beijing next weekend. Now, sitting where I am in Asia, there's this kind of muscle memory of how Asian currencies behave when US dignitaries come visiting to this part of the world to discuss trade and or FX or even if just FX policy enters into the financial market narrative.
So we call that last May and we are in May right now. There was an earthquake in Asian FX in the form of this massive drop in dollar Taiwan over a very short time period. Now, when the Trump-Besan duo passed through South Asia last fall on their way to Japan and Korea, they signed a series of fairly boilerplate sounding FX agreements with the likes of Malaysia.
And then abruptly, the Malaysian ring, it went on a trend appreciation run since mid October. CNY FX, of course, has been trend strengthening for the better part of four quarters now, you could argue, part of which is a part of this broader give and take as a part of the trade negotiations with the US. So the question for markets is what will next week bring?
Tony, I'm kind of sympathetic with you in thinking that this week's CNY intervention may have preempted any dramatic price action next week. And the devil will be in the details of what's announced. And while things are never really dramatic on a short term basis with China CNY, it's decent odds that at least for the next week in the run up to the actual Trump visit, the CNY fixings will remain relatively well behaved, maybe even inch lower a little bit next week.
And it'll be interesting to see if you get a period of dollar CNY trading durably below 6.80, whether that triggers a faster move lower, because it may not be the case that the market is prepared for a quicker extension of spot below that level. But for now, so we are constructive on CNY and the real interest will be to see how these fixings behave and the currency behaves after Trump leaves. But that's a discussion for a later week.
So Octavia, just bringing you back into this conversation now on to all matters, European effects, quite a bit of action there over the last week. Let's start with Sterling, where we've had a counter consensus, tactical bullish view. I think most people would instinctively push back against that.
How do you think about the pound now in the wake of the UK local elections? Hey, Arindam. Yeah.
So as you say, we've had a tactically bullish view on Sterling relative to the low yielders based on the idea that data is significantly beating expectations, solidifying Sterling's carry and, you know, this broader pro carry environment. And that has been playing out in this direction. But now the tactical focus shifts to what comes next politically.
For the elections themselves, our view has been that the election speed counts per se, whatever result that comes out today or tomorrow, isn't really what matters for Sterling. But rather what matters will be whether these results clear the way for a formal leadership challenge. So whenever that comes.
So as of the time of recording, Starmer has assured he is staying. But if or when a challenge against him is announced in coming days or coming weeks, we would expect major Sterling weakness. But the key point is that historically, these labor leadership contests take several months to resolve.
And that's a long time for the market to stay bearish on a currency where carry is attractive and over half of data releases have been significantly beating expectations. So, yeah, well, we would expect near-term volatility around political headlines. The fundamental backdrop of carry and data momentum should reassert itself over that longer dragged on for a timeline.
We're tactically cautious around that, but constructive beyond any initial reactions. Very good. Also, out of Europe, we got two Scandinavian central banks this week seem to go in divergent directions.
Quick takeaways from those. Yeah, on that, we had two contrasting outcomes that I would say reinforce the divergence theme within the Scandis. So firstly, largest bank hiked to 425, which was an upside surprise to split market pricing.
And the statement was very clear that inflation has been high for too long. And there's also domestic factors to be encouraging rates. The guidance itself validated the terminal pricing rather than encouraging the market to price more.
But it does cement Nokia's status as a G10 high yielder. And, you know, it's not loaded the carry available. So we remain bullish on Nokia and we see room for outperformance, particularly versus the low yielders.
So, you know, on the other side of the carry spectrum with a G10, you have Swiss and Yen. On the risk side of things, a sharp geopolitical escalation that brings oil materially lower would be a near term challenge. But the first thing I'd say is Nokia is still a high yielder and pro cyclical currency.
So dips on that have been shallow in any case. And secondly, what we learned also from the meeting this week is that even then, largest bank highlighted that its domestic wage and inflation dynamics, which are also informing their stance. So that also means it would make them slow to reverse course, even if we were getting some further normalization.
And on the Riksbank side, the hold was as expected. So they maintain optionality, but they underline downside data surprises and which leave the room to stay patient. But more strikingly this week for me was that Swedish inflation missed expectations for the sixth time in a row.
And that's pretty meaningful in our view, considering its low carry and what we believe to be a good environment for FX carry as a whole. And that should be a drag to stocky. So, you know, it's definitely reassured us that it remains a natural funder within G10 and that there is definitely this divergence going on between the Scandis.
OK, very good. Bullish Norway, not so bullish Sweden. That's very clear.
And last but not least, Pat got the non-farm payrolls reporting just now. So just curious about your overall read of the data and also any parting thoughts on the dollar, if you will. Yeah, thanks for them.
Look, I think it's a reasonably decent print. You know, the headline obviously came in above expectations, showing some signs of demand, which we've been missing for a while. And the rate was unchanged.
I think those things together are reasonably constructive. Now, obviously, these things are never perfect. You know, wages was a little soft.
A lot of the headline gain can be attributed to health care. So there's a bit of concentration there. And then U6 moved up a couple of ticks.
So keep an eye on that as well. But look, I think really two things to take away, I think, here for the FX. One is that we've been observing that basically since the second half of 2024, the broad dollar has generally tracked the contours of headline jobs growth in the U.S.
So basically it moderated as, you know, payrolls basically came down to recent lows last year. So if we are starting to get some semblance of not only stability, but actually improvement in job demand, I do think that could be important for the dollar, especially on the back of obviously something of a hawkish turn a little bit from the Fed committee last week. I would note that our economists basically, first, they forecast better labor demand overall throughout the year.
And second, when they plug that into a Taylor rule, that does tend to imply the appropriate policy rate later this year should be kind of north of four. You know, obviously I don't expect anything like that per se. We do have new leadership coming in.
But it gives you a sense of the direction where basically a few cyclicals in the labor market specifically continue to improve. Could be a reasonably decent support for the dollar, if not kind of an outright tailwind as the year progresses. But the second thing I would note also for FX is I think this is kind of a sweet spot print for carry.
You could have imagined a situation where it was really weak, you know, negative, negative headline, higher unemployment rate. That's bad for risk. Or on the other side, a very strong headline collapse in the U rates, broad dollar move higher.
Also not exactly great, you know, for risky currencies necessarily. So I think basically what this one is transmitting is it's reaffirming this idea that the global, the global growth backdrop is still overall hanging in pretty well. And it also kind of like continues to remove the Fed's flexibility in terms of its easing.
And that to me is all just kind of like conducive of, you know, staying long carry. And so it's not surprised, not surprising to me to see basically the dollar a little bit weaker on the back of this print with the kind of a higher beta and a higher, higher yielding cyclical names in the FX space continuing to do well. So I still think, you know, carry does tend to make a lot of sense here, especially when you're juxtaposing kind of the energy exporters against the importers.
So I think payrolls is supportive in that respect as well. All right. Thanks for that, Pat.
Thanks very much, boys and girls. Let's leave it there for this week. If you've made it this far in the podcast, thanks very much for listening in.
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