JPY: Intervention doubts as Dollar extends gains – MUFG

MUFG’s Head of Research Derek Halpenny notes the US Dollar has broken above the 100 level on DXY and pushed USD/JPY to fresh year-to-date highs, with Oil stabilizing near USD 100. He argues Japanese authorities face growing pressure over Yen weakness but sees limited prospects for successful intervention, even if USD/JPY is allowed to test or break above the 160 level.

Japan weighs options on Yen slide

"The rising price of energy is always a big issue in Japan given it imports nearly all its energy needs. The rising price is being exacerbated by the continued depreciation of the yen and the Japanese authorities are set to come under increased pressure to halt yen depreciation. Is intervention imminent?"

"We are not convinced but if intervention does take place it is unlikely to have lasting success. The MoF may well allow a break through the 160-level in order to gauge price action above that key level. We are now trading above the level where, in January, the Federal Reserve reportedly checked rates in USD/JPY, sending the cross 7 big figures lower over a three-day period."

"The problem for the MoF is that this is clearly a US dollar move and hence would likely be futile to intervene at this stage. While USD/JPY is at a new year-to-date high, EUR/JPY is over 2% lower than the January high. On a trade-weighted basis the yen has weakened (AUD/JPY and CAD/JPY for example are higher) but the scale of weakness in the BoJ NEER is marginal - -0.4%."

"In addition, it would be difficult for the MoF to argue there has been disorderly price action. USD/JPY is just over 2% higher over ten trading days since the conflict began. Allowing a break above the 160-level could well prompt the disorderly price action that would provide the justification for action at that point."

"We appear set up for further US dollar strength from here. Crude oil prices have stabilised at elevated levels with scope for further gains while the break above the 100-level in DXY (and below 1.1500 in EUR/USD) could see positive momentum further reinforced by a potential break above the 160-level in USD/JPY."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)