USD/JPY trades higher as USD finds its feet. Intervention still a threat

• USD/JPY recovers after last week’s losses on possible intervention and weak US jobs data. 
• Janet Yellen’s mild criticism of intervention may have helped the pair higher. 
• Japanese currency officials continue to threaten intervention, filling the road higher with “potholes”. 

USD/JPY trades at 154.35 on Tuesday, up almost three tenths of a percentage point, mainly as a result of the US Dollar (USD) ending its post-FOMC losing streak and recovering on the back of comments from Federal Reserve (Fed) officials suggesting they are not in a hurry to cut interest rates. 

The maintenance of higher interest rates for longer and further delaying of possible cuts is beneficial for the USD as it attracts more foreign capital inflows. This, and the fact that – in the case of USD/JPY – interest rates in the US are so much higher than in Japan, further aids USD and disproportionately disadvantages JPY. 

Barkin Rules out rate cut – BBH

The Federal Reserve bank of Richmond Chair Thomas Barkin said on Monday that he thought rates were high enough to bring inflation back to our target, but that “The full impact of higher rates is yet to come.”  

“This is basically ruling out a rate cut,” concluded analysts at Brown Brothers Harriman: 

Another bullish factor for USD/JPY is that overall interest-rate cut expectations in the US continue to fade. Now it’s not till November that a first rate cut is fully priced in. 

“Odds of a June cut remain steady at around 10%, but July odds have fallen to 35% and September odds have fallen to 85%.  A November cut is still fully priced in,” continues BBH. 

Yellen cautions Japanese authorities 

USD/JPY has benefited from another backdraught of late after it was revealed that Janet Yellen was not as supportive of Japan and Korea using intervention to prop up their currencies as had been thought – especially after their recent currency summit. 

In words over the weekend, Yellen was more critical, saying she’d prefer it if intervention was only used on rare occasions and that the US was notified prior to the event. 

“US Treasury Secretary Janet Yellen’s observation that FX intervention should be rare, and accompanied by consultation, doesn’t suggest a weaker Dollar is particularly desirable,” said Kit Juckes,  FX Strategist at Societe Generale in a note on Tuesday.

“It will embolden Yen bears…but whether we see another test, or a break of USD/JPY 160, depends more on the CPI data than anything else,” he added.  

Ueda changes his mind about impact of weak Yen 

Given the continued verbal warnings from Japan’s various “Princes of the Yen” however, USD/JPY bulls will still need to be mindful of possible “snakes” of intervention bringing prices sliding back down. 

On Tuesday, Bank of Japan (BoJ) Governor Katzuo Ueda once again repeated that excessive Yen moves are undesirable. However, he added that he was closely monitoring how the weak Yen affected “prices”. 

Analysts at BBH point out that this marks a 180 degree pivot for Ueda who said after the April 26 BoJ meeting, that a weak Yen was “not having a big impact on underlying prices yet”. 

His blunder after the BoJ meeting led to “further yen weakness and so Ueda seems to be doing some damage control,” BBH added. 

Ueda’s change of tone may be designed to appease certain business groups who are not happy with a weak Yen.  The chairman of Japan’s Keidanren business lobby, Masakazu Tokura, said recently, the Yen is too weak beyond 150 to the Dollar.

Further, top currency diplomat Masato Kanda also repeated his usual warning that the government will respond appropriately if there are excessive or disorderly movements in the FX market. 

All in all it suggests many reasons why the Japanese authorities are still probably ready to pull the trigger on further intervention, suggesting USD/JPY's ride higher could continue to be a bumpy one.