He feels that the overt commitment to act is important in this regard and the market reaction likewise. He writes, “This is why I think the feedback loops in market response are interesting. We are used to Japanese officials failing to weaken the yen. We’ve see countless attempts to use FX intervention, or to talk the currency down. They fail the yen remains strong. But now, we have had a move of roughly 13% from where I think a ‘rates-only’ model would put USD/JPY.”
All of that, and then some, will be reversed if the authorities don´t back up words with actions and in that sense, there is much more at stake this time. Juckes comments, “So we have a new broom in government and will soon have one at the BOJ. All change, and a huge amount to lose if they don’t carry on. In this regard, the way a currency behaves within its regime is like the way gravity works – it’s very strong while you are in it, but once you break free, it ceases to matter. FX traders place great store by range-trading, quant-models de facto do the same. Now that the rates-only model has broken down, everyone is trying to re-specify and while that goes on, there is no natural gravitational pull any more.”
He feels that this is a recipe for overshoot, with USD/JPY 97 a reasonable year-end target. Getting the pair over 100 would require the Fed to tighten monetary policy and USD/JPY 110 is a guess about where the peak could be when (if) US policy ever gets back to something like ´normal´ in a few years time. He finishes by noting that it corresponds to EUR/JPY 130 in extremis and even if the AUD is overvalued, a log term target above 105 is realistic.