UBS On-Air: Paul Donovan Daily Audio 'How to conduct monetary policy'
The desk interprets Japan's recent currency intervention as a strategic response to mitigate the yen's rapid depreciation, rather than as an effort to target a specific exchange rate. Per the full note source, the Ministry of Finance's actions, which resulted in a brief 5 yen move against the dollar, highlight the potential use of intervention as a buffer against speculative pressures and low liquidity risks during the August holiday season. Consensus remains focused on the implications of Japan's monetary policy trajectory, particularly after the unremarkable Bank of Japan decision to maintain interest rates. This backdrop positions the USD/JPY pair in a critical observation frame leading into future liquidity scenarios.
What the desk is arguing
The desk frames Japan's currency intervention as a necessary step alongside the Bank of Japan's unchanged monetary policy, suggesting that it serves primarily to stabilize the financial landscape temporarily. Per the full note source, such measures can only yield long-term effectiveness if they are aimed at addressing speculative weaknesses or correcting underlying economic fundamentals.
Given the recent depreciation of the yen, highlighted by the 5 yen swing against the dollar, there is clear indication that the government sees value in controlling rapid volatility as a preventative strategy. The focus here is on using the intervention as a breathing space for the Japanese economy to adjust fundamental imbalances, possibly worsened by seasonal low liquidity and speculative market behavior.
Where it sits in our coverage
Currently, our consensus target for the USD/JPY pair shows a range with targets from notable firms: - JPMorgan: 1.10 (Mar26) - BofA: 1.04 (Mar26) - Goldman Sachs: 1.12 (Mar26).
This view portrays alignment with JPMorgan, suggesting that the desk's interpretation sits towards the higher end of sentiment driven by the intervention dynamics, contrasting with BofA's more cautious target of 1.04.
How other firms see it
Firms such as JPMorgan and Goldman Sachs share a more optimistic view on the yen, reflecting confidence in Japan's potential to correct its economic fundamentals, albeit with different finishing lines in mind. Conversely, BofA holds a contrarian view, expressing skepticism about the durability of interventions and the yen's capacity for an upward rally.
Given the stakes involved in this dynamic, attention to other currency pairs such as EUR/JPY and AUD/JPY could provide insights into broader market sentiment and liquidity shifts that could correlate with Japan's monetary policy trajectory.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Japan's intervention aims to stabilize the yen amidst rapid depreciation.
- 02Market strategies will look for signs of improving fundamentals post-intervention.
- 03Consensus ranges reflect varied perspectives on the yen's long-term strength.
- 04Low liquidity in August may provoke sharp moves in currency markets.
Market implications
Watch for volatility in the USD/JPY pair, particularly with any post-intervention market responses that indicate trader positioning or sentiment shifts. Potential triggers include economic data releases or unexpected moves from other central banks that may influence YEN behavior.
Risks to this view
A reversal of the current positioning could occur if speculators perceive the Bank of Japan's policies as insufficient to counteract long-term depreciation pressures, with an additional risk stemming from any shock economic data leading to drastic changes in market sentiment.
Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's 7 o'clock in the morning London time on Friday the 31st of July. Japan has been busy with the Ministry of Finance apparently deciding to order the Bank of Japan to intervene in the foreign exchange markets.
It's the Ministry of Finance's money that's being used here. The intervention led to a 5 yen move in the dollar-yen exchange rate that has now partially unwound. Intervention in support of a currency works in one of two scenarios.
If the intervention is against speculative attacks on the currency, as it increases the risks of speculation, or if the intervention is used to buy time in order to correct the underlying fundamentals that have caused the currency to weaken in the first place. Japan's intervention seems more likely directed at the pace of recent weakness rather than driving the exchange rate to any specific level. There is also a suggestion that the intervention is a preventative measure ahead of a period of low liquidity during the August holiday season, when more dramatic moves in foreign exchange markets might potentially occur.
After all that excitement, the Bank of Japan policy decision, unchanged rates, was rather dull in comparison. However, it is a trend. The UK's Bank of England also left interest rates unchanged, although there were three dissents, just like the Federal Reserve in the United States.
Unlike the US Fed, the Bank of England decision did not cause a sell-off in the long end of the bond market. This is probably due to the fact that Bank of England Governor Bailey is articulate and communicates clearly to the markets, which means that monetary policy in the UK is not adding unnecessary risk premia or raising real yields in an economically damaging fashion. Bailey's comments after the decision seem designed to calm market concerns about imminent rate increases.
There is quite a lot of inflation data due today. The Japanese Tokyo inflation figures were a touch higher than expected in July, but purely driven by energy prices. From Europe, France, Italy and others provide their flash consumer price inflation estimates for July, and then the euro area aggregate is due.
Yesterday, Spain's numbers were a fraction higher than expected, with Germany in line with expectations. The only place inflation seems to be a looming problem is in the imaginations of the ECB's Bundesbank faction. Out in the real world, there is no smoking gun of price increases to cause undue concern.
The United States has little to compete with all of this drama. There is the Michigan Consumer Sentiment Poll, which is of little economic value these days. Yesterday's data confirmed that consumers in the States are doing OK, and the willingness to spend is not checked by the rather soggy levels of wage growth.
It's noticeable that wage and salary growth has been below 4% for two consecutive quarters. That's something which hasn't happened since 2016. Of course, the growth of side hustles and alternative income streams, and the increasing importance of pension income to the overall health of the US consumer, mean that there are other ways the consumer may be supported.
But this data is not really suggestive of second-round inflation effects arising from the labour market in the United States. That's all for today. Have a good day.
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