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The USD/JPY pair has re-entered the intervention zone, crossing the 150-level for the first time since November, driven by robust US inflation data this week. Despite being the weakest G10 currency year-to-date, the yen's underperformance against non-dollar currencies reflects a renewed appetite for carry positions, as market participants perceive a reduced risk of a near-term rate hike from the Bank of Japan (BoJ).
USD/JPY Intervation Price on H1
Positioning data reveals a resurgence of JPY short positions since the beginning of the year, following a liquidation at the end of the previous year. The question now arises: Will USD/JPY continue its upward trajectory, or will the threat of intervention, as observed in the past at these levels, impede further gains?
COT (Commitment of Traders) JPY
The recent weaker-than-expected GDP data, indicating a technical recession for Japan, does not significantly alter the yen's outlook. The economic downturn, marked by a contraction in household consumption for three consecutive quarters, is largely attributed to the inflation shock experienced by Japanese households.
However, the diminishing level of contraction in each quarter suggests improving prospects, with subsiding inflation potentially easing concerns for the BoJ about lifting rates from negative territory.
Finance Minister Suzuki's statement on monitoring FX "with a greater sense of urgency" underscores escalating concerns within the Ministry of Finance (MoF). Vice Finance Minister Masato Kanda attributes the yen's decline to speculative selling, signalling a potential for intervention. The government's determination to mitigate the negative impact of inflation on households is reinforced by the Prime Minister's low approval ratings, partially influenced by a cost-of-living crisis.
BoJ Governor Ueda's recent remarks in the Diet reaffirm the central bank's commitment to avoid deflation. Ueda emphasizes the role of Japanese companies in raising wages aggressively amid labour shortages, potentially providing confidence for the BoJ to lift policy rates. While there is a perceived will to end negative rates, the decision will likely depend on factors such as wage increases and economic conditions.
Looking ahead, the BoJ's position on lifting rates in the coming months suggests greater downside potential for USD/JPY. However, broader factors, including limited scope for US yield rebound and a disinflation trend, may counterbalance this. Despite potential fading momentum, intervention by the MoF/BoJ could still play a role in curbing further USD/JPY appreciation, aligning with previous instances when the pair reached similar levels.
Insights Inspired by MUFG: Credit to Their Analysis for Shaping Some Aspects of This Text
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