With dollar-yen falling to 17-month lows below Y108 Thursday, with no sign of a larger rebound, the FX market was wary about what Japanese officials may say or do in the coming weeks.
Physical intervention was deemed doubtful at current levels, for a variety of reasons, and was unlikely to be seen until levels below Y105 and maybe even closer to Y100, analysts said.
However, there will likely be attempts to jawbone the yen lower in the sessions ahead, especially if dollar-yen keeps falling, they said.
Dollar-yen was trading at Y108.22 Thursday afternoon, on the low side of a Y107.67 to Y109.90 range, with the earlier low the lowest since Oct.27, 2014, when the pair bottomed at Y107.61.
Earlier that month, on Oct. 15, 2014, dollar-yen posted a low of Y105.23. That day, ten-year U.S. Treasuries fell by 33 basis points, the worst intraday move since the Lehman crisis, analysts said at the time.
With dollar-yen falling 5.4% from a Y113.80 high, seen March 29, to today's 17-month lows near Y107.67, myriad explanations have been offered up as to the cause.
After the reaction to the BOJ's move to QQENIRP in January, which saw Japanese stocks gradually fall and the yen rise as Japanese government bond yields moved more negative out the curve, the market began to fret what the central bank would be able to do going forward to bolster the economy/create inflation. The next BOJ decision is April 28 and beyond that June 16.
One school of thought is that negative risk sentiment toward Japan has been causing the yen to rise.
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BOJ Governor Haruhiko Kuroda spoke overnight and did not use the opportunity to voice concern about yen strength. It is not unusual after a larger move higher in yen for BOJ or government officials to say that the move was not reflecting fundamentals.
In response dollar-yen, which had already closed below Y110 yesterday, took out Wednesday' lows near Y109.34 and extended lower
Earlier, Chief Cabinet Secretary Yoshihide Suga repeated comments made earlier in the week, i.e. that the Japanese government was closely monitoring yen movements and would respond if needed (Nikkei Asian Review).
JP Morgan strategists maintained that locals, rather than foreigners have likely been the cause of USDJPY weakness.
The yen "has systematically tended to appreciate during Asian trading even when the lure of Abenomics was still strong in 1H15," they said.
Exporter hedging, which results in U.S. dollar selling, as well as "the absence of large global macro flows" typically "felt only after London open," may be behind the yen gains seen versus the dollar recently, they said.
Even after Q1 equity turmoil subsided, "offshore/global investors" appeared more reluctant to participate "in the yen trend, while onshore/Asian selling of USD/JPY has accelerated," they explained.
JPM's Tokyo team said that "a large part of the recent yen strength is likely driven by Japanese corporate repatriation around the fiscal year-end in March," they noted.
This may "explain why the break of Y110 in USD/JPY has been more or less orderly so far," the strategists said.
It could also be that "spec investors, whose high frequency trading tends to generate noise, have probably not participated in this downtrend in very material fashion, and are unlikely to jump in at current levels given increasing jawboning from Japanese authorities and the threat of punitive monetary easing at the BOJ meeting in end-April," JP Morgan said.
Japan's MOF weekly transaction data, released overnight, showed that Japanese investors sold Y50.1 billion in foreign stocks, bought a net Y65.1 billion in foreign money market instruments, but more importantly, sold Y1.5551 trillion ($14.3 billion) in overseas bonds for the week ending April 1.
Last week on the bond front, for positions at the end of March 25, Japanese investors bought a net Y1.1641 trillion ($10.7 billion) in foreign bonds.
As a reminder, in the week ending March 18, Japanese investors bought a net Y2.3 trillion ($21.2 billion) in overseas bonds, the strongest ever recorded and on the back of several weeks of other hefty foreign bond purchases.
Analysts were keeping a close eye on these domestic flows for confirmation that Japanese investors are again looking inward.
In prior years, after fiscal year-end March 31, typically Japanese investors begin to look abroad again in search of better results, with some of these outflows usually evident in April.
While there is a domestic component behind recent yen strength, i.e. exporter hedging, Brown Brothers Harriman analysts noted that narrowing U.S.-Japan interest rate differentials are another factor.
Ten-year U.S. Treasury yields have fallen from 2.0% on March 16, ahead of the Fed decision, to 1.687% today, the lowest yield since Feb. 24, while ten-year JGB yields have traded roughly a -0.125% to -0.025% range.
"The yen's rise has coincided with a sharp fall in the U.S. 10-year premium over Japan," they said.
"The premium peaked on March 22 near 204 bp; Today, it is below 180 bp," the analysts said.
Brown Brothers has a technical objective for the dollar in the Y106.80-Y107.00 zone.
"Despite the talk of a secret agreement struck in Shanghai to weaken the dollar, Japanese and American officials are likely as surprised by the yen's strength as are a market participant," the analysts said.
"This is most likely not an engineered move," they said.
The proximity of various G7 events next month would suggest that the BOJ might sit on the fence and let dollar-yen freely trade, unless swings become too erratic.
G7 finance ministers and central bank governors will meet May 20-21 in Sendai City, with their discussions setting the tone for the G7 Summit May 26-27 in Ise-Shima.
"Japan will host the next G7 meeting in May, reducing the risk of Japan intervening against JPY, which would be seen as acting against the spirit of the G7/20, leaving the currency moves down to the markets," said strategist at Morgan Stanley.
"Accordingly, FX investors seem to have found an easy target to play further USD weakness, namely selling USDJPY," they said.
In 2016, Japanese retail investors have increased their holdings of foreign FX-denominated money market holdings to record levels, with recent yen strength forcing these accounts to buy yen.
Also,"equity investors are using JPY's high inverse correlation with equities to reduce risk exposure by buying JPY," the strategists said.
Going forward, the BOJ will face pressure to look at "alternative measures" and "the higher JPY rallies, the bigger is the pressure for the BOJ to look at policy alternatives," with buying of exchange traded funds, one such alternative, Morgan Stanley said.
"Here size matters. Should the BOJ opt for a small program (Y3-5 trillion), dollar-yen will remain a sell on rallies, in our view," the strategists said.
It would take a Y10 trillion ETF purchase program to see "a prolonged equity market rally lifting USDJPY via lifting FX hedging strategies back to around Y116," they said.
"However, before we get to this stage, USDJPY may have to fall further to 'force' the BoJ to rethink its current monetary policy approach," MS said.