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.
Key Quotes
“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.”
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