Why Won’t BOJ Intervene?

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Market Drivers April 8, 2016

USD/JPY recovers 109.00 retaken
Cable see a sharp spike higher
Nikkei 0.46% Dax 0.59%
Oil $38/bbl
Gold $1238/oz.

Europe and Asia:
EUR Current Account 20.0B vs. 16.5B
GBP UK Trade Balance

North America:
CAD Employment 8:30
USD Wholesale Inventories 10:00
GBP UK GDP Estimate 10:00

It’s been a decidedly more sedate night in the currency market on the last trading day of the week with both USD/JPY and GBP/USD finally finding some footing.

USD/JPY ran through the 109.00 level retaking the figure in late Asian session dealing after some mildly supportive comments from Japanese officials. Japanese finance minister Aso stated that current FX moves have been one sided and the government will take steps as needed to curtail rapid FX moves.

There has been a lot of debate in the currency market as to exactly when the BOJ would consider intervening given the sharp rise in the yen. USD/JPY is down more than 12 yen since the central bank announced its negative rate policy in a move that has taken many market participants by surprise given the gap in yield differentials.

However much of the decline may be blamed on dollar weakness rather than yen strength as Fed’s reticence to tighten policy has driven US yields lower compressing much of the gap between the two currencies. That’s why any intervention move by BOJ could prove to be problematic if US rates continue to fall in tandem. For USD/JPY to see any sustained support US yields would need to stabilize and begin to rise again and BOJ may be waiting with its teeth clenched for the Fed to act.

Any intervention by BOJ is further complicated by the fact that the country is hosting the G-7 summit in May and member nations are not supposed to “manipulate the currency” unless it deviates greatly from fundamentals. That’s why Japanese officials have been on the wires more frequently over the past few days as they lay down the foundation for a case that yen is grossly overvalued on a fundamental basis. In either case it appears that BOJ is unwilling to act just yet, and may simply allow the market to stabilize naturally after the speculative frenzy of the past few weeks. Only another massive selling wave in USD/JPY that sees the pair break the 107.00 figure would trigger a more aggressive response from the officials. For now they hoping that yesterday’s sharp decline will serve as a swing low.

In North America today, the US calendar is barren but Canada releases its employment report with markets expecting a rebound to 10K new jobs from -2K the month prior. Canada has shed jobs for 3 out of the past 4 months and another disappointment could send USD/CAD towards the 1.3300 level as the market begins to absorb the full impact of the oil price decline. The loonie has had a massive rally along with the rebound in oil, but with crude now stalled below the $40/bbl mark any negative fundamental surprise could spark a much stronger rally in USD/CAD towards the 1.3500 figure over the next few weeks.

Boris Schlossberg
Managing Director

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