G10 FX Weekly
Group Economics Macro & Financial Markets Research
11 February 2016
JPY: Rising FX intervention risk Roy Teo Senior FX Strategist Tel: +65 6597 8616 roy.teo@sg.abnamro.com
• Yen has rallied 8% since BoJ announced negative interest rates • The risk is rising of FX intervention by the Ministry of Finance • Past interventions show that there is a maximum intervention impact on Friday morning
Japanese yen rallies 8% since BoJ announced negative interest rates The Japanese yen (JPY) has rallied dramatically, more than 8% against the US dollar (USD), since the Bank of Japan (BoJ) announced negative interest rates on 29 January. There are several reasons for this. For a start, investor sentiment has continued to deteriorate resulting in safe-haven flows into the yen. Moreover, financial markets have scaled back expectations that the US Federal Reserve will tighten monetary policy this year. As a result, US yields (2 year) have declined considerably. This has increased the downward pressure on USD/JPY. The triggering of rumoured stop loss orders has accelerated the move in USD/JPY. USD/JPY and 2 year US-JP interest rate spread USD/JPY
%
125
1.1
120
0.9
115
0.7
110
0.5
105
0.3
100 Jan-14
0.1 Jul-14 USD/JPY (lhs)
Jan-15
Jul-15
Jan-16
2y US-JP yield spread (rhs)
Source: Bloomberg
Rising risk of FX intervention by the Ministry of Finance Given that the BoJ decision last month to introduce negative interest rates was a close call (5-4 vote), it will take some time before BoJ members will come to an agreement on further monetary stimulus. The next scheduled monetary policy meeting is on 15 March. Therefore, the pressure is now on the Ministry of Finance (MoF) to intervene in currency market to warn speculators that the direction in the yen is not a one-way bet. Indeed, data from CFTC show that speculators’ net long
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G10 FX Weekly - JPY: Rising FX intervention risk - 11 February 2016
futures position in the yen have surged in the past few months to the highest levels since the MoF last intervened in October 2011 (see graph below). FX intervention and speculative futures positions Number of contracts
JPY bn
100000
10000
50000
8000
0
6000
-50000
4000
-100000
2000
-150000 Jan-08
Jan-10
Jan-12
Jan-14
0 Jan-16
Speculative futures positions (lhs) BoJ FX intervention JPYb (rhs) Source: MoF Japan, Bloomberg
In addition, the yen’s volatility has more than doubled since December last year. Indeed, Finance Minister Aso and his deputy have commented that recent moves in the yen have been ‘rough’ and are watching for speculative moves. However, financial markets have continued to push USD/JPY lower as they test when FX officials would pull the trigger to intervene in currency markets. If there is no FX intervention and/or improvement in investor sentiment, further downside in USD/JPY towards 110 in the coming weeks cannot be ruled out. FX intervention and USD/JPY volatility 1mth volatility
JPY bn
20
10000 8000
15
6000 10 4000 5 0 Jan-10
2000 0 Jan-12
Jan-14
Jan-16
1mth USD/JPY volatility (lhs) BoJ FX intervention JPYb (rhs) Source: MoF Japan, Bloomberg
Previous FX interventions show maximum impact on Friday morning The past four FX interventions by the MoF often occur during early Asian trading hours but not on a specific day. However, we judge that the impact of FX interventions in USD/JPY will be the largest on a Friday morning. Hence, the next live date for intervention could be on 12 February Asia morning. The G20 Finance Ministers’ and Central Bank Governors’ meeting on 26-27 February is not a hurdle for Japan to intervene earlier as they did previously as well on 31 October 2011, days before the G20 leaders’ summit.
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G10 FX Weekly - JPY: Rising FX intervention risk - 11 February 2016
Impact of previous FX interventions on USD/JPY Day Monday Thursday Friday Wednesday
Date 31/10/2011 04/08/2011 17/03/2011 15/09/2010
Time % move in USD/JPY Size of intervention JPYbn 0900hrs 4.6 9,092 0900hrs 3.7 4,513 0600hrs 6.3 693 0900hrs 3.5 2,125
Source: Bloomberg, Japanese Ministry of Finance (MoF). *Size of intervention may be across various days given that MoF data shows on monthly basis. The % move in USD/JPY is also based on high and low of actual day of intervention.
ABN AMRO major currency forecasts (under revision)
EUR/USD USD/JPY EUR/JPY GBP/USD EUR/GBP USD/CHF EUR/CHF AUD/USD NZD/USD USD/CAD EUR/SEK EUR/NOK EUR/DKK
11-Feb Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 1.1311 1.06 1.04 1.02 1.00 1.00 1.02 1.05 1.10 111.70 120 123 126 130 126 123 120 120 126.35 127 128 129 130 126 125 126 132 1.4449 1.41 1.37 1.32 1.33 1.35 1.40 1.46 1.57 0.7828 0.75 0.76 0.77 0.75 0.74 0.73 0.72 0.70 0.9702 1.04 1.08 1.12 1.15 1.15 1.13 1.14 1.09 1.0974 1.10 1.12 1.14 1.15 1.15 1.15 1.20 1.20 0.7045 0.68 0.66 0.64 0.62 0.64 0.68 0.70 0.72 0.6653 0.62 0.60 0.58 0.58 0.60 0.62 0.64 0.66 1.3964 1.44 1.46 1.47 1.48 1.40 1.38 1.35 1.30 9.5048 9.50 9.50 9.50 9.50 9.25 9.00 8.75 8.50 9.6877 9.50 9.25 9.00 9.00 8.75 8.50 8.25 8.00 7.4638 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46
Source: ABN AMRO Group Economics
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G10 FX Weekly - JPY: Rising FX intervention risk - 11 February 2016
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