The rise of the USDJPY and possible BoJ intervention

(Giles Coghlan LLB, Lth, MA – HYCM)

The USDJPY has been continually pushing higher as the market prices in aggressive Fed policy action. As long as the US keeps rising interest rates the USDJPY can keep moving higher as the interest rate differentials keep favouring USD strength over and above the JPY. However, the weaker the JPY becomes the more likely the Bank of Japan is going to act against it. A weak JPY is advantageous for Japan’s export market, but a strain on importers. So, here is what to expect as/if the JPY continues to rise.

Bank of Japan action

In June the USDJPY rose above 130 and the Ministry of Finance, the Financial Services Agency, and the Bank of Japan all met together. The conclusion of the meeting was that action would be taken, but no indication was given as to what that action would be.

USD/JPY at 140 is hitting the right levels

If the USDJPY makes 140 then the pair will be hitting new daily technical highs and be making a strong indication that further JPY is ahead.

This will be a key level to watch for signs of JPY intervention. However, it is probably unlikely that the BoJ would intervene here as the gains are clearly due to US policy and it would be very hard to fight the USD bids right now.

If the BoJ does intervene look at EURJPY and GBPJPY

The GBP and the EUR both have medium-term reasons for weakness with recessions looming for both countries. So, should the JPY suddenly have reasons for strength then look at the potential for GBPJPY and EURJPY shorts if the BoJ starts acting to strengthen the JPY.

Watch the GBP/JPY closely [Video]

The Bank of England brought forward projections for a 2023 recession to 2022 this year for the UK at its last meeting. Inflation was also expected to rise above 13% for the UK in October as the new energy price cap bites. So, with a slowing economy, the GBP has been losing value over the last few weeks. However, it has kept relatively strong against the JPY. Why? It’s just because the JPY has been very weak too on the rising rate differentials between Japan and the US.

So what’s the trade? Well, if the Bank of Japan acts against the weakness in the JPY the JPY could rapidly strengthen against the GBP. That would favour GBPJPY selling. Also, look at the strong seasonals that are ahead favouring GBPJPY selling around the middle of September.

Major trade risks: The major risk here is monetary policy does not complement the seasonal pattern. Remember, previous patterns are not a guarantee of future patterns.

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