USD/JPY: Testing the Limits of FX Intervention - UBS
UBS analyst team pointed out that their bullish USD/JPY view is being
challenged by strong negative momentum after the USD/JPY broke below the
key support level of 110 last week.
“Short-sellers have been emboldened after the Wall Street Journal published an article last week, citing Japanese Prime Minister Abe that countries should avoid ‘arbitrary currency intervention.’ Chief Cabinet Minister Suga subsequently clarified that PM Abe’s message was misunderstood and warned that Japan stands ready to intervene in the event of ‘one-sided’ FX moves.”
“Nonetheless, the lack of actual FX intervention thus far suggests that speculators could continue to push the USD/JPY even lower in the very near term, toward the next support levels of 107 and 105.”
“While it is not clear whether the Ministry of Finance will conduct actual FX intervention, the case for further Bank of Japan easing has gained in strength. Japan’s economic data has weakened significantly in recent months. The latest Q1 Tankan survey revealed a sharp deterioration in business sentiment and corporates’ inflation expectations, largely due to the strong appreciation of the yen. The Nikkei manufacturing PMI fell to 49.1 in March, the lowest since February 2013, and Japanese households’ inflation expectations have fallen to a three-year low."
"As a result, the BOJ is under tremendous pressure to deliver sizable monetary stimulus at its next meeting in April or June, or lose credibility with regard to achieving its 2% inflation target. On top of monetary stimulus, the government is also likely to announce a supplementary fiscal budget in the coming months, in order to maximize the impact on Japanese financial markets ahead of the critical Upper House elections in July.”
“In sum, while the strong momentum exposes the USD/JPY to further near-term declines, we expect a USD/JPY recovery in the medium term, helped by aggressive monetary easing and reflationary efforts by Japanese officials.”
“Importantly, the US dollar should also recover broadly in 2H 2016. With the markets only pricing in a full Fed hike in September 2017, we believe the markets are ill-positioned for two Fed rate hikes later this year. As such, we see significant potential for USD to rebound once markets start to adjust their Fed rate expectations.”