There are three highlights to the foreign exchange market today. First, the yen is marginally softer. The yen’s strength this month has been the main development. After making a marginal new high yesterday, some semblance of stability emerged in North America yesterday, and this has carried over into today’s activity.
The greenback largely held above JPY107.90 and rose to JPY108.40 in late Asia. It has been consolidating in the European morning. Japan’s Finance Minister appeared to ratchet up the rhetoric a notch, warning that if the moves are extreme and one-sided, officials will take action. Yet the fact that there has been no material intervention would imply the Finance Minister’s conditions have not been met.
This is important. Many who have stressed the “currency war” narrative have been warning since at least mid-February that BOJ intervention was a growing risk. The fact that there has been no intervention seems to support our contention, which the arms control agreement, not to use the foreign exchange market for competitive advantage, remains intact.
Officials are in Washington DC for the IMF and World Bank meetings. This could be a potential forum to coordinate intervention, but we continue to argue that the bar to intervention is high. There seems to be little reason to expect the US to agree to dollar-buying intervention. Similarly, there is no reason to expect the ECB to agree on euro buying intervention.
The yen’s strength coupled with disappointing inflation data may raise the risk of additional easing by the BOJ later this month. The poor reaction to the unexpected easing–adoption of negative rates–at the end of January, may give BOJ officials cause to pause and reevaluate their tools and tactics.
We note that the initial yen rally in the first half of February exhausted itself, and the dollar-yen traded broadly sideways from mid-February through late-March. The recent leg up by the yen at the start of the month may be a combination of seasonal pressures and speculative attention. The seasonal pressure seems to be ebbing and, as we noted, over the last two weeks, speculators in the futures market have added to both long and short positions.
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