Credit Agricole explores the rising tensions surrounding the USD/JPY exchange rate, particularly in the wake of strong warnings from Japan's Vice Minister of Finance, Masato Kanda. The report considers whether a move to 148 in USD/JPY could compel the Ministry of Finance (MoF) to engage in direct foreign exchange intervention.
Key Points:
Verbal Warnings Heightened: Masato Kanda's comments are interpreted as a clear signal of imminent FX intervention, escalating from a level four to a level six or seven on Credit Agricole's verbal intervention scale.
Volatility Metrics: USD/JPY has rapidly moved from 146 to nearly 148 in one trading day. This kind of volatility could potentially justify FX intervention on the grounds of "smoothing out excessive volatility," in line with statements made by former BoJ Governor Haruhiko Kuroda.
Fundamental Justifications: Japan is one of the G10 countries most susceptible to a negative terms-of-trade shock due to higher oil prices, which partially explains the recent moves in USD/JPY.
Fair Value Estimates: Credit Agricole's FAST FX model estimates a short-term fair value for USD/JPY at 144.72. Moves above 147.81 would significantly overvalue the currency pair, triggering a sell trade recommendation.
Trading Recommendations:
Be Prepared for Intervention: Given the heightened level of rhetoric from Japanese officials, traders should prepare for the possibility of a rapid and significant intervention by the MoF.
Monitor Volatility: Watch for two to three-figure moves in USD/JPY within a single trading day, as this could serve as a trigger point for intervention.
Be Mindful of Overvaluation: Keep an eye on levels above 147.81, as this moves into overvalued territory according to Credit Agricole’s FAST FX model.
Implications:
For Traders:
Cautious Trading: Traders should exercise caution and be prepared for the potential of sudden and significant price moves resulting from potential intervention.
Risk Management: Consider using hedging strategies to mitigate risks associated with potential intervention.
For Policymakers:
Transparency and Communication: Clear communication will be crucial to manage market expectations effectively.
Collaboration: It may be necessary to coordinate with international bodies like the US Treasury and G20 if intervention becomes necessary.
Conclusion:
Credit Agricole suggests that the Ministry of Finance in Japan may be preparing to intervene in the USD/JPY market, especially if the currency pair moves towards the 148 level. Traders are advised to be prepared for this possibility and to watch for signs of excessive volatility.
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