🏛️Markets are pricing possible BoJ intervention amid USDJPY rally
The USDJPY pair today broke above the 160 barrier, a zone not seen since 1986. The continuation of the pair's uptrend has accelerated recently on the back of, among other things, better PMI data from the US economy, which strengthened the US dollar in the broad FX market. The Japanese yen weakened against the US dollar, two days ahead of the Federal Reserve's key consumer price inflation indicator, PCE. Although we didn't learn any data from Japan or the US today that could justify the high volatility, the market still seems to be exerting speculative pressure on the yen as Japan's economy shows signs of improvement while the Bank of Japan maintains its dovish stance.
The swaps market is pricing that the BoJ will raise interest rates by 10 basis points at its meeting scheduled for July 31. However, this outcome is not certain, for past CPI data has not indicated that the slightly higher inflation readings were driven by an actual increase in consumer demand (one of the BoJ's key conditions for a rate hike). Source: Bloomberg Financial LP
- Recent statements by leading politicians and representatives of Japan's financial sector indicate that Japanese elites are looking more and more carefully toward a weakening yen, which could increase domestic inflationary pressures.
- According to Wells Fargo analysts, the Bank of Japan will hold off on potential intervention until at least the 165 level on the USDJPY pair; they also indicated that the bank needs more volatility to achieve the intended effect of currency interventions, which have already cost bankers more than $60 billion this year. Japan's Finance Minister Suzuki and Foreign Exchange Delegate Masato Kanda have recently indicated that the BoJ is ready to intervene 24 hours a day
- Traders, however, do not seem particularly concerned about the risk of another intervention and are selling off the yen. Bloomberg analysts suggest that 161 on USDJPY is also a likely level for intervention, although the pair is likely to be left with little volatility today, ahead of Friday's PCE data reading. A lower-than-expected PCE reading could increase volatility on the yen and make intervention more likely, further supported by a potential drop in yields and the dollar index.
The USDJPY pair is breaking out to new multi-year highs. Source: xStation5
