Forex Japan

FX Daily: Moving to DEFCON2 on Japanese FX intervention

ING Economics (Holland)

   29 April 2022
FX Daily: Moving to DEFCON2 on Japanese FX intervention. Yesterday’s spike in USD/JPY through 130 prompted quite a reaction from Japan’s Ministry of Finance. FX intervention seems a lot closer now, but will only serve to stabilise and not reverse a macro-driven trend.

For today, the focus will be on European 1Q GDP and April CPI, plus some of the Fed’s preferred price gauges. We also have a Russian rate meeting


USD: Today’s Employment Cost Index will be key FX markets are slightly calmer today, helped by some stability in Chinese asset markets. The renminbi, a key agent in recent FX volatility, has firmed a little as China’s Politburo has promised to do more to support growth. The sharp rally in the whole USD/Asia FX complex over the last week had contributed to broad strength in the dollar, although this trend now may be due a pause.

Away from China’s commitment to support growth, we have seen both Japanese and Korean authorities express ‘extreme concern’ over recent weakness in their currencies and an implicit readiness to act. It feels like Japanese unilateral FX intervention is a lot closer – perhaps we are at DEFCON2 in terms of readiness – and we are now close to witnessing Japan’s first FX intervention in over a decade.

 Such intervention could probably see several billion dollars sold (typically at a European or US open). However, the reasons for USD/JPY trading above 130 are well documented and any correction, say, to the 127/128 area will see plenty of fresh dollar buyers emerging.

For today though, the dollar focus is squarely on US price data. We will see the March release of one of the Fed’s preferred price gauges – the PCE deflator. This is expected at a new cycle high of 6.7% year-on-year. Perhaps even more important is the quarterly Employment Cost Index (ECI) data, a key gauge of US productivity.

A strong rise in the ECI is expected at 1.1% quarter-on-quarter. Assuming that is seen, expect pricing for the Fed tightening cycle to stay firm. Currently, the market prices the Fed Funds rate at 2.88% by the end of the year and currently sees the terminal Fed funds rate at 3.15% next year.

The recent high in expectations was at 3.30%.DXY may be due some consolidation under 104 given that technical indicators are registering some very overbought readings.

Yet there will be lots of dollar buyers ready on dips and looking to position for a summer dollar rally as the Fed slams on the monetary brakes.

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