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No Intervention can stop USD/JPY

By Ashraf Laidi  |  23/03/2018 15:07


January 19th article, I mentioned several reasons backing my forecast for further yen strengthening (USDJPY would fall). from its 110 level at the time. Briefly restating those reasons: i)

Japanese pension funds and insurers-- known for hedging their holdings of foreign assets against the risk of yen strength (which would deplete the value of their assets when converted to yen) have tilted their hedge ratios higher against the risk of their foreign earnings depreciating in yen terms. An increase in their yen hedge ratio further support the currency.

Other reasons related to prolonged yen strength are relatively higher current account surplus than most nations (except for Germany and Switzerland), unsustainable pace of bond purchases by the Bank of Japan, improved inflation and higher upside for policy tightening than most other nations.

Focus on JPY TWI not only USD/JPY
The importance of the USD/JPY pair for Japanese’s economic is paramount no doubt paramount, especially as the US ranks the 2nd largest destination for Japanese exports and imports (after China).

Yet, in order to determine what part of the decline in USD/JPY is driven by yen strength rather than USD weakness, it is more appropriate to delve into the yen’s trade-weighted index (provided by the Bank of Japan) for a more accurate view on the currency’s overall performance.

Enlightening Disparity
The chart above illustrates the yen gained 11% against USD since the start of 2017, while appreciating under 3.0% in trade-weighted terms over the same period.

The clear disparity between the yen’s performance against the US dollar and that of a basket of currencies suggests that any action by Japanese authorities to intervene via selling yen would be of little use.

Japanese monetary officials -- experts at the art of FX intervention over the past 30 years are well aware of the general limitations of currency intervention, particularly when the tide of economic and monetary currents is largely pointing to the direction of yen strength as well as USD weakness.
Any rebounds in USD/JPY resulting from interventionist remarks by Japanese and US officials are considered as a selling opportunity in the pair.  Anticipating 105 yen on a trade-weighted basis would make 101 in USDJPY a preliminary stop, before subsequently reaching 100.


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