Credit Agricole discusses the heightened possibility of Japan intervening in the FX markets, especially if the USD/JPY rate breaches the critical 150 mark.
- Japan's Ministry of Finance (MoF) has frequently signaled the potential for FX intervention using terms like “Watching FX closely with a sense of urgency” and “Won’t rule out any option against excessive FX moves.”
- Based on Credit Agricole's assessment, these statements rate at level 6 on their verbal intervention scale, where 7 indicates a looming actual FX intervention.
Market Reaction to Warnings:
- Despite these verbal warnings, the USD/JPY pair keeps inching upwards, suggesting traders are testing the MoF's resolve.
- Both the implied and actual volatility of the USD/JPY has dipped to 6-month lows, even as the rate approaches the significant 150 level.
Game of Chicken:
- FX traders appear to be playing a daring game with the MoF, pushing the USD/JPY closer to the pivotal 150 mark.
- The MoF, if deciding to intervene, must rationalize its actions to the US Treasury as measures to curb extreme FX volatility.
- The US Treasury permits interventions to control unwarranted volatility but prohibits actions aimed at specific exchange rate levels.
- Consequently, a potential breach of the 150 level in the USD/JPY could induce heightened volatility, driven by stop-loss runs and position adjustments. This surge in volatility could provide the MoF with the necessary justification to intervene.
Credit Agricole highlights the increasing likelihood of Japan stepping into the FX market, particularly if the USD/JPY breaches the 150 threshold. This break could lead to substantial market volatility, offering the necessary grounds for intervention. FX traders are seemingly challenging the MoF's threshold for intervention, steadily pushing the USD/JPY rate upward despite continuous verbal warnings.