A (chunky) snippet from ING and their thoughts on intervention to stem the fall of yen.
- One of the first, and perhaps the only, objective of FX intervention is that it needs to be successful. Not that we have seen much FX intervention in the G3 FX space over the last decade, but successful intervention in liquid FX pairs would need to be coordinated. Getting the Fed involved in an operation to sell dollars at a time when the Fed is about to hike rates 300bp is highly unlikely. If intervention were to occur, it would probably be Japan going alone.
- But as our chart above shows, what was more common during the 1990s and up until about 2003, Japanese FX intervention over the last couple of decades has been the rare exception rather than the rule. As a member of the G20 and the closer-knit G7 group, Japan has had to adhere to flexible exchange rates – as a means to bring China in line with a less managed currency.
- To justify own-account FX intervention to sell USD/JPY, Japanese authorities would have to strongly argue that the weak yen was not only a Japanese problem but a global problem. In fact, it seems hard to argue that a weak JPY is even a problem for Japan. There certainly seems no ‘sell Japan’ mentality developing – Japanese equities have not underperformed. And if the Japanese are concerned that the spike in energy prices is being exacerbated by the weak Yen – they can either hike interest rates or adopt fiscal support measures (an inflation shield) rather than intervening.
IBG go on with this, which is what I mention over and over again that prompts the jawboning comments we are getting out Japanese authorities:
- The only case we see for the Japanese Ministry of Finance to instruct the BoJ to sell USD/JPY is in the case of a disorderly FX move. What is disorderly? That will be a function of the speed of the move and market conditions. In the past, Japanese policymakers have looked at the FX options market to judge market conditions. Prior FX interventions for disorderly moves have come when one month traded USD/JPY volatility was closer to 18/20%. The recent move to 125 saw traded volatility rise to 11%. We suspect USD/JPY would have to be trading at or above 130 for volatility to be anywhere near the 18/20% again.
USD/JPY has seen a rapid move up in past weeks, which has triggered the verbal 'interventions', but that's all so far:
