USD/JPY: The chances of a sustained rebound in the yen are limited – Scotiabank

Japan’s Ministry of Finance (MoF) finally snapped today and ordered the Bank of Japan (BoJ) to intervene in support of the yen as the USD/JPY neared 146. Nonetheless, economists at Scotiabank believe that the JPY is unlikely to strengthen.

BoJ to the rescue

“Having initiated the intervention process, we think the BoJ will have to keep at it; the central bank has very deep pockets and can vary its tactics (asking the ECB, BoE or even the Fed to act as its agent out of Tokyo hours, for example). There is, in effect, a line in the sand for USD/JPY now around the 146 point which markets will likely challenge to test the BoJ’s resolve and which we think the BoJ will have to be prepared to spend billions (USD) to hold. In all likelihood, however, the BoJ will be alone in trying the beat back the USD.”

“Absent a major change in underlying fundamentals or (however unlikely) concerted action against the USD, the chances of a sustained rebound in the JPY are limited, however. The key issue here, of course, is the diverging monetary policy settings between the US and Japan which have prompted a sharp slide in the JPY since the Fed first started getting serious about raising interest rates in the spring.” 

“Peak Fed pricing and a rebound in global stocks will work against the USD eventually but US 10-year yield rising to 3.63% today suggests the BoJ will have its work cut out in the coming days if the Japanese monetary authorities want to maintain credibility.”