Yen Depreciates by Nearly 145! Is Foreign Exchange Intervention Imminent?

The US GDP for the first quarter has been revised upward by 0.7%, fueling expectations of two interest rate hikes by the Federal Reserve. As a result, the Japanese yen reached a seven-month low of 145, and there is a growing possibility of intervention by Japanese authorities in foreign exchange markets. We believe that the Bank of Japan currently has a higher tolerance for yen depreciation and will likely intervene only if the yen depreciates beyond 150.

On June 29th, the U.S. Department of Commerce released final revised data, indicating that the U.S GDP for the first quarter of 2023 grew by 2% on an annual basis, which was revised upward by 0.7% compared to the previously announced revised data and exceeded market expectations of 1.4%.

The higher-than-expected GDP data suggests strong economic growth in the United States, providing sufficient room for the Federal Reserve to continue raising interest rates. CME data shows that the probability of a 25 basis points rate hike in July is currently at 86.8%, and the probability of another rate hike in November has risen to 32.7%.

【Source：CME】

After the data was released, the two-year U.S. Treasury yield briefly rose by nearly 20 basis points, the U.S. dollar index increased, reaching a two-week high. Meanwhile, the yen hit a seven-month low, with USD/JPY surpassing the 145 level, leading to widespread market expectations of an increased possibility of authorities intervening in foreign exchange markets.

On September 8, 2022, the USD/JPY broke through 144 as the Japanese Ministry of Finance, central bank, and financial bureau held a joint meeting.

On September 14, the USD/JPY approached 145 as the Bank of Japan implemented a rate check, requiring major Japanese commercial banks to provide details of foreign exchange transactions to the central bank.

Subsequently, on September 22, the Japanese government and central bank conducted an intervention amounting to 2.8 trillion yen but failed to halt the depreciation of the yen.

After the yen breached the 150 level against the US dollar, on October 21 and 24, the Japanese authorities implemented interventions totaling 6.35 trillion yen. As the US dollar weakened, the yen started to appreciate.

【Source：Bloomberg】

Referring to last year's intervention process, which involves "government authorities' trilateral meeting → exchange rate review → foreign exchange intervention," the trilateral meeting has already been held at the end of May. Whether the exchange rate review will be implemented in the future is a concern for the market.

Based on the relevant statements, the Japanese authorities have a relatively high tolerance for the depreciation of the yen. The exchange rate review may be conducted when the yen depreciates to around 150, and foreign exchange intervention may occur if it depreciates beyond 150.

Currently, the USD/JPY exchange rate has exceeded the upper boundary of the 2% range of the 20-day moving average. The RSI indicator is at 75, indicating overbought conditions. There is a possibility of a future decline in the USD/JPY exchange rate, with support seen around 141.5.

【Source：TradingView】