“Checking rates” may not be a familiar signal to many of us. But when the Ministry of Finance in Japan is on the end of the line, currency traders know that we are close to some kind of intervention by the Japanese authorities to stem the weakness in the yen seen in recent months. Or at least, it is a signal that forceful action is imminent. Whether that is enough to stop the current trend remains to be seen.
The yen has plunged through a series of multi-decade lows against the surging dollar in recent months. Traders like to have “lines in the sand” for certain pairs, where they believe authorities will intervene in markets as they are not happy with the level of their currency. We’ve seen several of these in USD/JPY with 130, 140 and now 145 spouted as key markers.
Ahead of these levels, central banks often then have various stages of unhappiness before direct intervention takes place. Initially this will include “jawboning” where officials complain about extreme and disorderly movements in their exchange rate. This often then precedes comments about “closely monitoring” price action and then the threat of determined action if necessary – DEFCON 5 if you like.
It seems the Bank of Japan’s “rate check” appears to be protection against a ceiling of 145 in USD/JPY. This kind of action and intensified verbal intervention has ratcheted up the pressure on bulls hoping to challenge multi-decade highs at 147.67. But the probability of actual intervention is low because unless the Bank of Japan’s monetary policy changes, it is doubtful that intervention will work.
Yield differentials are key for FX markets, and these are expected to widen further with more aggressive Fed rate hikes. The end rate for Fed funds is now above 4.3%. There is a roughly one in three chance that the world’s most powerful central bank decides on the “hike of the century” and raises rates by 100bps at its meeting next Wednesday. This is in stark contrast to the BoJ who stand resolute in its ultra-loose monetary stance. The bank is still capping yields on its 10-year government bond at 0.25%.
The history books also tell us that US support is critical for turning around momentum in a currency attack. Direct, unilateral intervention almost never works when it is done solely by Japanese authorities. For now, yen pressure has eased but the Fed seems highly unlikely to rein in their interest rate hike plans, as it tackles rampant inflation which looks like it will remain sticky for longer than previously thought.