Japanese Yen: Intervention risks and Fed path – Rabobank

Rabobank's Senior FX Strategist Jane Foley discusses USD/JPY ahead of the United States (US) July Consumer Price Index (CPI) release, highlighting how softer US inflation could weaken the Dollar and lower the odds of another break above USD/JPY160. Foley outlines their central view that the Federal Reserve (Fed) will hold rates steady this year and a 3‑month USD/JPY forecast of 158, assuming some support for the Japanese Yen (JPY).

Dollar, carry trade and intervention risks

"If US CPI inflation data prints a number for July on the softer side of market expectations, the value of the USD could stumble. It may be too soon to expect the MoF to intervene again, but a softer USD combined with fear of intervention would likely reduce the odds of another break above USD/JPY160. Stronger than expected US CPI inflation data and a rebound in the USD, would be an unwelcome development from the point of view of the Japanese authorities given that it could inject fresh life into the carry trade and heighten the risk of another attempt at USD/JPY160."

"While we would not rule out another move back to 160 near-term, RaboResearch’s 3-month forecast of USD/JPY158 in 3 month assumes, possibly optimistically, that a number of factors can come together to give the JPY some support."

"It is RaboResearch’s central view that the Fed will hold rates steady this year. A re-pricing towards this view would likely soften the USD."

"A move in short-term interest rate differentials in favour of the JPY would help offset the carry trade and lessen the risk of a breach of USD/JPY160."

"As it stands, however, the government will likely have to make more effort to respond to the market’s concerns about fiscal discipline in order to reassure investors and calm the JPY."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)