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Foreign Exchange

Japanese MoF intervention provides temporary relief

Further rounds of Japanese intervention may follow, given the swift retracement of the USDJPY rally after the Ministry of Finance intervened on Monday.

But analysts say Japanese yen selling by the MoF will provide only temporary relief for USDJPY. Japan woke up the currency markets with an aggressive intervention that sent USDJPY to a three-month high of Y79.55, a 5% rise from the post-war low of Y75.35 it hit earlier in the session.

Analysts say the size of the intervention is likely to have been substantial given the price action. Some market estimates put it in excess of $100 billion, which would easily outstrip the record intervention of $57 billion from the MoF in August.

While some market participants expected intervention by the Japanese authorities, given the series of new post-war lows being set in USDJPY last week, the timing, directly ahead of the Federal Open Market Committee and the G20 meeting on Thursday, was surprising.

Japan’s unilateral currency market intervention is unlikely to receive international support at that G20 meeting. The US, in particular, is unlikely to find the Japanese attempts to weaken their currency helpful, at a time when it is trying to convince China to accelerate the pace of appreciation of the renminbi against the dollar.

As traders ran into “industrial-sized” bids at Y79.20, there was talk that Japanese authorities may be engaging with a Swiss National Bank-style floor, despite no mention of such measures by finance minister Jun Azumi, as he confirmed the intervention. However, any such move is widely seen as unlikely given the political controversies involved and the sheer size of the market in Japanese yen.

As with previous one-day unilateral interventions by the MoF, the initial rally began to fade as Japanese exporters used the opportunity to hedge at favourable levels. Indeed, USDJPY began to retrace the move higher at a faster pace than previously, as real money and model accounts bought strongly in the European session, leaving USDJPY trading at 77.85 in London at 10.40am.

Tokyo-based strategist Masafumi Yamamoto, at Barclays Capital, said there was scope for the MoF to engage in further large scale one-day intervention and they might even continue during the European and New York session, given the pace of the retracement.

“If the MoF continues its current intervention strategy of minimum frequency but maximum daily size, it will retain sufficient ammunition to maintain this policy for some time,” said Yamamoto.

Until today, Japanese policy seemed to be focused on dealing with the symptoms of a strong yen, rather than weakening the currency, but today’s actions accompanied with the finance minister’s comments suggest attention has returned once again to the currency markets.

"Whatever the market thinks, I will continue intervening thoroughly until I am satisfied," said Azumi.

Yet despite, the apparent large-scale boost to Japanese yen liquidity, strategists at Citi and Morgan Stanley expect the intervention, as with prior ones, to provide only temporary relief.

“The flow backdrop is not conducive to a self-sustaining rally in USDJPY,” said Todd Elmer, a Singapore-based strategist at Citi. “Our positioning (PAIN)  index suggests that investors were already positioned short Japanese yen in anticipation of policy action so there is little risk of a stop loss driven run higher.”

In addition to profit taking among institutional investors and the retail sector, regional reserve managers may also treat this as an opportunity to buy Japanese yen, which will likely cap the move.

Furthermore, Monday’s 4pm fixing, where portfolio hedging rebalancing flows should be in the form of relatively large dollar selling could be another drag for USDJPY, according to Yamamoto.

“Ultimately, in the absence of coordinated intervention, the yen will appreciate again,” said Hans Redeker, head of FX strategy at Morgan Stanley. “Japan is a surplus country, and low bond yield returns in the US and Europe will keep funds in Japan and the Japanese yen strong.”

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