The recent joint currency intervention by the United States and Japan has reignited activity in the major currencies market. US participation in foreign exchange intervention is rare, making the coordinated action a notable signal that both governments saw excessive yen weakness as a concern warranting a unified response. Japan's willingness to intervene had been widely anticipated, and it was confirmed last Thursday. The initial market response was consistent with expectations, prompting Japan to seek additional support in case traders tested its resolve to act unilaterally.

MUFG believes the latest coordinated action could signal a turning point for the yen. The firm sees faster Bank of Japan (BOJ) rate hikes as a potential tailwind that could strengthen the currency, even amid ongoing fiscal and economic challenges. The yen's multi-year decline has been driven in large part by the wide interest-rate gap between Japan and the US, as the BOJ maintained ultra-low policy rates while the Federal Reserve raised rates aggressively. The BOJ's shift toward normalization, including its exit from negative rates earlier in 2024, underpins the case for a narrowing rate differential.

MUFG suggests that the United States may have reached an understanding with Japan under which the BOJ would continue normalizing monetary policy as part of its agreement to participate in the joint intervention. While acknowledging this is speculative, the firm points to a comment from Mimura, who stated after the coordinated move: "I have a shared understanding with the BOJ."

MUFG argues:

"Overall, the latest development gives us more confidence in our forecasts that the yen is in the process of bottoming out. The threat of further joint intervention and a faster pace of BOJ hikes should provide more support for the yen, and discourage speculators from running elevated short yen positions."

Bank of America (BofA) also recognizes the joint intervention as a significant shift in the USD/JPY landscape. However, the firm identifies the 155 level as the critical threshold that will determine the pair's next direction, despite recent efforts to support the yen.

BofA states:

"We believe a break below 155 could trigger a meaningful shift in market dynamics. If 155 holds, market participants are likely to continue viewing it as a floor and may re-establish short-yen positions. Conversely, a sustained move below 155 could trigger stop-loss selling in USD/JPY."

BofA also notes that the latest BOJ Tankan survey showed Japanese corporations are assuming USD/JPY levels in the 152s for the current fiscal year. The firm infers that 150 and 155 are among the most widely used corporate planning assumptions. Given the strengthening consensus for yen weakness this year, hedge ratios may have declined.

"A break below 155 could therefore encourage corporate hedgers to shift toward selling USD/JPY on rallies rather than sitting on USD/JPY carry," BofA added.

Beyond the 155 level, market participants are likely to watch upcoming BOJ policy meetings for signals on the pace of further rate hikes, as well as any additional statements from US or Japanese officials regarding intervention readiness.

Source: Investinglive