Yentervention: World’s Only Defense Against The All-Mighty Dollar
Japan’s Ministry of Finance is the only major currency authority in the post-COVID era to fight back against USD strength via intervention - and win. Can they pull it off again?
An hour from midnight in Tokyo on Tuesday October 3rd 2023, USDJPY finally reclaims the 150 handle- a price level that it had previously “enjoyed” for only 18 hours in October 2022 before getting shot down by Japanese government yentervention.
Minutes later at 11:11pm Japan time (10am EST), this happens:
USDJPY is slammed -2% downward to 147.33, wiping out 10 straight days of relentless dollar gains in a matter of seconds.
Another minute later and USDJPY is back up to 149.50, now wiping out the preceding few seconds of sharp yen gains in the few seconds that followed.
What in dollar-all-mighty’s name was that all about? Was this an act of unilateral currency intervention executed by the Japanese government - and a failed one at that? And what are the implications of a Japan yentervention on broader, global cross asset markets - be it actual state yentervention or market perceived and executed yentervention?
In this article, we will explore these critical questions surrounding this particular move from a markets-first-approach, take a look back to see what had transpired exactly one year ago since Japan’s second of two acts of yenterventions on September and October 2022, and extrapolate from all that we have at our disposal to examine the broader global cross-asset ripple effect underway since - all in an effort to map out what may be ahead in the immediate to near term.
Why Should You Care?
If you are currently thinking something along the lines of:
“I don’t live in Japan, nor am I a currency trader, nor do I have any JPY exposure anywhere in my portfolio or my life. So why should I care about yentervention - or for that matter, why care to watch the yen at all?”
By the end of this article, you will hopefully see the broad based significance of the Japanese yen on financial markets writ large, and the government officials in Tokyo who recklessly use their enormous power to meddle in international foreign exchange markets like the scientists at Jurassic Park breeding raptors -
However, since I know that I don’t have the luxury of “just take my word up front and read onwards to find out,” here are 2 simple and straight forward charts that illustrate (in part) JPY’s wide-scale market significance. Here’s why you should care, up front:
This recent Oct 3rd volatile yen move not only held back spot USDJPY itself to trade sub-150 resistance - but it also capped, if not reversed the recent breakaway surge of the broader USD complex for much of the world as well.
…and so much so that the dollar had even decoupled from U.S. yields continuing to surge. This cross asset dislocation is perhaps (and extremely likely) a very temporary condition, but nonetheless, volatility triggered by the JPY 150 breach had stopped the otherwise bulletproof USD upside runaway momentum dead in its tracks.
“Great - and USD impact or otherwise, I don’t care about short term price action in currency markets either.”
Japan yentervention number 2 of 2 occurred a year ago in 2022, almost down to the day - Friday October 21st at around 10:30am EST. That moment had not only marked top-tick in USDJPY and triggered the start of a major reversal after months of one-way upside, but it also garnered the exact same outcome for the risk free rate as well - 10Y US yields:
10Y Treasury yields, which began 2022 at 1.5%, had ripped +250bps higher in the 6 months from May, on a historic and seemingly unstoppable, one-direction sell off at the long end of the curve - due to “no marginal buyers of USTs left out there, only sellers, along with Fed QT AND new issuance flooding supply” (sound familiar?). But on October 21st, Japan officials unilaterally blasted 30 billion U.S. dollars at market and triggered the start of a massive rush back into Treasuries starting from that exact yentervention moment until March 2023, taking a full percent out of 10 year Treasury yields.
So, that’s why you should care about Japan yenterventons, or the yen in general - particularly as the current market setup is nearly identical to that of a year ago. USDJPY and JGB yields are rapidly closing in on their respective “upper levels of tolerance,” driven by a relentless surge in both U.S. yields and the U.S. dollar, in combination with contradictory Japanese policy experimentation and uncertainty. And I haven’t even mentioned JPY carry trades and the worldwide risk-asset havoc that would come from an rapid, forced, and uncontrollably vicious carry trade unwind would do.
There’s a reason I’m not writing this in Japanese (and it’s not because if I did so, it would redefine what “nonsense” means at a whole new level beyond my standard nonsense) - this article, like every single piece of content I make, addresses the foreign community’s interests. It concerns the United States dollar and the risk-free rate of the United States Treasury, and thereby relevant to all financial assets worldwide. Assets that you DO care about, if not outright own.
Why is it important to identify and distinguish sharp USDJPY pullbacks as acts of official state intervention, or driven by market activity?
There is a night-and-day difference between a state actor defending its currency against global market forces, and market-induced market activity (and then further critical distinctions within market-derived market activity). And again, in this specific case, identifying these differences are critical in analyzing the vicious, “unyielding” (bad pun very much intended) surge in global sovereign bond yields underway.
Just as knowing who or what was behind the 150 cap in USDJPY can be instrumental in understanding broader market activity, knowing what took place can even serve as a potential leading directional signal, as cross-asset relationships have dislocated ever since the 150 was shot down from the grassy knoll:
Note two things in particular about the current state of this USDJPY vs US-JP yield spread relationship:
•On the chart above- it seems that for this particular set of markets during this particular period, currency has been leading yields (or spreads) directionally.
•Chart below- it seems that USDJPY not only has a 150 resistance (by government or otherwise), but USDJPY touching, or even just approaching that electric fence at 150 then triggers an even sharper upside acceleration in the ongoing yield climb:
USDJPY is very clearly tiptoeing timidly just beneath 150, and is not keeping up with ever widening US-JP nominal yield spreads in the manner that it had been prior to printing 150. And if this gap needs to close back up, what’s the path in which it does so?
Does the seemingly “unnaturally”-suppressed sub-150 USDJPY break out towards 155~160 and meet yields higher?
Or does FX continue to lead rate spreads directionally, and overshot US and JGB yields, as well as overblown yield spreads meet USDJPY lower?
OR- do JGB yields accelerate to meet U.S. yields higher (even if U.S. yields continue to trend higher), such that the yield spread narrows from beneath (rather than from US yields above), to then meet USDJPY lower?
Precedence from September 2022 Yentervention 1 of 2:
JPY Loses, Suggesting USDJPY 150+ Ahead
In 2022, Japan MOF shot off its first of two yenterventions in September - and it failed within a month, as USDJPY shook it off and surged right back to, then through its yentervened level.
Hence the need for a second round of yentervention the following month in October - which “succeeded” (“success” defined as relative - USDJPY has yet to break the October 2022 yentervened level as of this writing).
There are multiple reasons and explanations as to why Sept ‘22 and Oct ‘22 yenerventions, which were by and large the same general act taken, had two entirely opposing cross-asset market outcomes and results.
In order to understand what happened, and what is currently happening, here’s a quick primer on the basic relationship between currency pairs and yield spreads price action, and why the yen was absolutely crushed in 2022.
Nominal Yields Spreads and FX Pairs
When international market forces are left in “default mode” (i.e. absent any temporary, non-economic aberrations), major FX pairs and their respective nominal yield differentials tend to move in tandem with one another, broadly speaking.
In 2022, this is in large part why USDJPY exploded from 115 in March to 150+ by October- as US and global yields surged higher, and Bank of Japan’s YCC kept JGB yields artificially pinned down, yield spreads blew out between US and Japan, and USDJPY made a +30% move in 8 months.
Dusting off some charts from ‘22 below - as I was tracking (if not actively trading FX and rates futures directionally) spot JPY, yields, and YCC at the time.
SIDE NOTE: How Japan Yenterventions Are Executed
Despite all-too-common parlance all over media of “Bank of Japan steps in to intervene in yen.. etc.” - BOJ does NOT “do” FX intervention. It is the Ministry of Finance (Japan’s “Dept of Treasury” - Prime Minister’s cabinet) who makes FX intervention decisions - namely, Finance Minister Suzuki (Secretary Yellen’s counterpart), and Vice Minister Kanda - Japan’s “Chief currency diplomat.” Bank of Japan just follows orders given by Ministry of Finance and executes the buy / sell market activity at the trading desk, but are not the decision makers. (Also a “fun fact” - former BOJ Governor Kuroda, who will forever be remembered in history as BOJ Governor, had actually spent the first few decades of his career at Ministry of Finance, and even held the Vice Minister of FX Meddling position. So, he knew the game inside and out, and still let JPY get killed at the expense of keeping JGB yields capped in 2022 - something to think about, and keep in mind).
2022: Two Rounds of Japan Yenterventions
Round 1: Sept. 22, 2022
About 15 minutes after the September 2022 Bank of Japan Monetary Policy Meeting press conference - where then-Governor Kuroda stood firm on a 25bps YCC ceiling as global yields continued to rise and USDJPY on the cusp of a runaway momentum breakout through 146, the Ministry of Finance announced that they had intervened directly in FX markets - the first time doing so in a quarter century. Furthermore, there was no U.S. Treasury Department counterpart agreement, which is (was) G7 governments’ protocol - MOF blasted 20 billion of USD unilaterally (at least as far as their public stance was being presented).
Personal trading horror story from this moment:
It seems that Suzuki's definition of "volatility" is "one directional yen weakness."
As opposed to the actual meaning of volatility - large price swings in both directions - the very kind that results from
MOF smacking USDJPY down 5 big figures in a matter of minutes. That, Suzuki-san, is what we market participants and Japanese residents would refer to as "undesirable volatility!"
As stupid and hypocritical as it is to cause extreme volatility by citing undesirable volatility, Suzuki-san’s “markets should move on fundamentals” takes the cake. Fundamentally, USDJPY belonged HIGHER, and what Japan was doing in foreign exchange market intervention is the very definition of non-fundamentals.
“Currencies should move on fundamentals?”
“Volatility is undesirable?”
Well, then STAY THE HELL OUT OF FOREIGN EXCHANGE MARKETS, G7 FINANCE MINISTER SUZUKI.
Following this state-actor’s unilateral, non-economic intervention, the currency pair’s fundamentals based on nominal yield spreads showed a market that pointed to USDJPY to be much HIGHER in reaction to the non-fundamental action taken in Sept 2022. MOF achieved USDJPY 140 at lows, but it seemed almost inevitable that 150 would return - only question was when. And if the broader markets harbored this sentiment, along with market fundamentals that pointed to USDJPY +10 figures higher, then “inevitability” shortens the time in which the inevitable gets realized.
This is why this yentervention was so short lived. But far more significant than anything else - Japan MOF entered an incredibly dangerous game, and one which there is no end once started.
Round 2: Oct. 21, 2023
Exactly a year ago down to the date as of this writing, which was about a half hour past midnight on a Friday in Tokyo on October 22nd, 2022 - USDJPY breaks through 150. Then 151. Then 152… nope. 151.96, and then - BOOM. Shots fired for yentervention part 2.
MOF via BOJ sold $36 billion / bought 5.4 trillion JPY for the largest daily purchase through intervention on record.
And this time, it worked (relative to round 1) - as that was top tick. By which I mean, it turned the 2022 year to date one way market trend around, and not for a day, or a week, or a month - it reversed half its gains in half the time it took to get there - and, on its one year anniversary today, still remains the highs yet to be broken.
Why did it work this time? Again- plenty of reasons and explanations debated out there. For me, it’s simple - yentervention part 2 actually DID swing MARKET FUNDAMENTALS in its favor, as that marked top tick in US yields, and USDJPY fell alongside U.S. YIELDS falling, and yield spreads narrowing.
So now the question is - why did market fundamentals cooperate this time?
It catalyzed a massive, multifaceted, and self sustaining exiting out of overcrowded positioning across asset classes - starting with the short JPY futures trade that every hedge fund and their mother was in.
Yentervention 2 had immediately triggered the biggest JPY futures short squeeze on record, levels not seen since the Nov 2016 shock Trump win / Hillary lose US presidential election results that flipped global market polarity upside down (and then back again hours later).
Approximately $50 billion notional worth of JPY futures traded that day - most of which occurred in 2 hours.
As I keep repeating- this put the top in the relentless, one way surge in 10Y U.S. yields.
This too was driven by the futures market- as a (far smaller) short squeeze 10Y UST futures was triggered in tandem
…as, in 2022, short 10Y UST futures and short JPY futures were essentially the same bet - a hawkish Fed bet. Both short positions were profitable, both were record crowded in positioning, and thus, both saw profit taking (buying to cover/exit), leading to further profit taking, in a self sustaining market mechanism.
Asset managers and Levered traders (hedge funds) alike drastically cut their net short JPY positions in the coming weeks, for a long, sustained flow of buying JPY and USTs.
And as you can probably imagine, a sudden, sharp, and sustained trend reversal in the U.S. dollar and U.S. Treasury yields side by side do not occur in a markets vacuum.
Here is what the JPY reversal did to gold - which (until this past week) tend to move in very tight correlation with the yen. Yentervention also put in bottom tick on GC futures:
And although I could go on further- here is one more for those who may think that yentervention only had impact on “haven assets.”
The Nasdaq had a horrendous 2022- but it didn’t end the year at its lows.
JPY futures vs Nasdaq futures:
Now, the Nasdaq bottoming is not so much a function of JPY as it is of a turn in the risk free rate of UST yields- BUT, again, what triggered the sudden turnaround in the risk free rate?
Suzuki, Kanda, and the Japan Ministry of Finance triggered all of the above.
Triggered vs Sustained
Note what I am saying- Japan MOF had TRIGGERED the REVERSAL (the initial short squeeze) - which is of course a massive feat, and something that nobody or nothing else was able to do throughout the entire year. I am not by any means praising these market manipulating gamblers playing with its citizens’ livelihoods and breaking with G7 protocol of market determined prices. I am merely pointing out the global, cross asset firepower on display.
Japan Officials’ Strategy: Aggressively Wait
That said, the strategic tactic that Japan MOF, as well as BOJ under Governor Kuroda holding dead firm on YCC through a historic 2022 year of policy divergence was brilliantly executed (again, within the context of doing horrendously stupid things like YCC or Yenterventions, let alone simultaneously. Strategy goes as follows:
•BOJ is not going to lift YCC upper bands along with global peer central banks tightening policy and lifting rates, precisely BECAUSE the other central banks are doing so (and the others doing so for good reason) - because if BOJ changes policy when under severe market pressure, it will be perceived as having given in and capitulating, and then they will be destroyed. Bank of Japan’s ONLY real weapon it has is the label of “widowmaker” - you don’t fuck with the BOJ, and you definitely don’t dictate what BOJ policy will be, markets. BOJ will always do things on their own terms, or at least present it that way, and the more that markets push them, the more they will refuse, BECAUSE of market pressure, not despite. And in a rising global yield environment, an artificial cap on JGB yields (a floor of hard support under the JGB market) comes at the expense of the currency.
•MOF, incessantly noisy as they are with daily jawboning about weak yen complaints, are ultimately ALSO on BOJ’s side - which is often forgotten. BOJ being the only major central bank who is actively easing into global tightening and rising inflation is NOT at odds with MOF. Yes, MOF oversees currency, while BOJ oversees rates, and BOJ policy stubbornness is killing the currency. But, who is the biggest (if not ONLY) beneficiary of BOJ’s radical standalone endless JGB buying and yield curve controlling? The Ministry of Finance is - as they are the body who must issue trillions in JGBs at rock bottom borrowing costs to fund the world’s most indebted sovereign. So, MOF is not “anti-BOJ YCC” by any means. But they also have to mind the currency destruction. Which is why you hear endless complaints about FX, and not a word criticizing JGB rates and BOJ policy (and it’s absolutely not because MOF respects “independence.”)
•So, both entities, BOJ and MOF, had been waiting and praying for Powell, Lagarde, Bailey and the rest to strangle the global economy into recession, or at least for global inflation to come down enough for hawkish policy divergence to flip back towards policy convergence - in which the others’ policy direction heads back to where the permanently dovish BOJ is stuck at.
BOJ continues to keep borrowing costs capped for MOF, and MOF tries its best to keep the yen afloat with jawboning - and they wait. And wait. And try to buy time. And wait. Until Sept 2022 BOJ meeting day - when it was understood that BOJ policy will still remain unchanged, and that Fed pivot was taking too long, and USDJPY was on a runaway momentum higher. And that’s when MOF decides to dip its toe into the forbidden and yentervenes 15 minutes following Kuroda’s BOJ press conference- they tried to turn the market, but if not, at least buy even a month or 2 more of time for a Fed pivot to price in, or a turn in data, or aliens to land on Earth and attack, or ANYTHING that will get a global rush back into haven bonds and yen.
And as the September yentervention gamble ran out- they rolled the dice again in October, and triggered the short squeeze. BUT - October yentervention (or ANY yentervention) by itself would have also been short lived.
These things are used to reverse market momentum, and if lucky, trigger a short squeeze- but the longer term, sustained short COVERING (and new longs entering) thereafter - that’s a job for broader macro fundamentals to turn. And that yentervention-to-macro turnaround baton hand off is what needs to be timed as best they can. And that’s what MOF misfired too early in Sept, but nailed in Oct.
Here is the most important chart of this yentervention saga- the “second times a charm” in matching up the timing of the JPY forced short SQUEEZE, which subsequently bleeds into a series of macro catalysts for the sustained JPY short COVER:
At the time, and for many months following (and even to this very day), you will hear western (US based American) “market strategists” and other talking heads giving extremely stupid “explanations” as to why USTs bottomed in “late Oct ~ Nov” - things like “…because that’s where investors thought yields were attractive enough…” and then cite the ensuing data above. But ask them - why THEN at THAT moment? And you will get non empirical nonsense.
Dude. It was the Japan Ministry of Finance huge yentervention futures short squeeze grenade thrown into an incredibly overcrowded trade.
Where are we now, and where are we headed?
I have no idea for the latter.
But now that you know the precedence from last year, the current setup is remarkably similar to the Sept ‘22 yentervention, on many fronts.
First of all, the praying for this “recession coming” set up, the other major central banks’ pivot hope, and the dragging feet and buying as much time as possible - all of that is (somehow) very similar to a year prior from Tokyo’s on-hold perspective.
Now, lets look at green and red blinking tickers, putting aside “who yentervened” in early October for a moment, and just look at the relative cross asset price action.
The yen (and the broader dollar index) has decoupled from yields and spreads:
It’s not just bond yields. Remember that JPY & Gold futures attached at the hip phenomenon?
Take a look at where that relationship is currently:
Here’s the JPY vs USTs divergence from the futures angle:
So, if we base current on last year’s markets, it looks more like the Sept ‘22 move with JPY trading on intervention (fears or activity), rather than the Oct ‘22, when global cross asset markets participated directionally with USDJPY’s non fundamental smack down.
So, USDJPY 150+ looks like it’s in the cards before USDJPY 146.
“Japan’s Official Announcement: The government has nothing to say.”
Naturally, the immediate blame for the recent, sudden USDJPY cliff drop triggered at the 150 level and spanning 3 big-figures falls upon Japan’s Ministry of Finance, who had been repeatedly attempting to stem the one-way decline with ineffective jawboning measures on a daily basis, very much including explicit threats of imminent currency market intervention if deemed necessary.
Yet, on Wednesday morning after the 150 crash, Finance Minister Suzuki took a public stance of “no comment” on whether or not the Ministry of Finance had indeed intervened in the market. Vice Minister Kanda, Japan’s top currency diplomat, echoed Suzuki by neither confirming nor denying any government involvement.
Most will interpret MoF’s morning-after “pleading the fifth” as confirmation that indeed, official intervention by Japan had taken place. After all, the last time these very individuals at MoF had intervened into markets on October 22, 2022, they had also exercised their right to remain silent in the immediate aftermath of slamming USDJPY -3.8% within a half hour down to 146 from 151.96 - the level that still remains the 3-decade high since. But I warn against taking the MoF’s bait.
While we can speculate, we should absolutely not rush to conclude that it was indeed the Japanese government who had intervened in FX markets at this moment. In fact, I will lay out the case for why this may NOT have been an act of official intervention below.
Either way, MoF releases currency intervention stats and activity at the end of each month - so until then, there is no definitive answer for what had actually taken place.
The Case For NO Intervention
There is a strong case to be made that intervention did not occur in official capacity for the October 3rd JPY move.
Some preliminary data pulled and analyzed by those who are far more experienced and knowledgable on institutional FX mechanics here in Tokyo have estimated that the notional trading volume in the inter-dealer markets from 2022’s yentervention days were approximately 6x greater than that of this recent October 3rd’s notional turnover.
A subsequent Reuters article suggests a similar absence of unusual money market data that would come subsequent to an intervention:
“The central bank's projection for Friday's money market conditions indicated a 1.09 trillion yen ($7.32 billion) net receipt of funds, not far from the 800-900 billion net receipt of funds estimated by brokerages, excluding intervention.”
Finally - the very act of market participants and commentators around the world to immediately and almost unanimously assume “JPY intervention just occurred at 150!” would in and of itself suggest that many market participants had also positioned for a 150-line-in-sand accordingly (and a very crowded position at that). Not only does this make “USDJPY 150 cap” a market reality, but then connects the move to a predisposed explanation, regardless of facts.
In my strong view, this was a self-fulfilling market prophecy that had occurred from layers upon layers of resting limit and stop orders, options positions, and systematic programming, all clustered at and around the 150 level, in combination with a VERY jumpy market, let alone jumpy (or outright paranoid) market participants.
Ministry of Finance’s “maybe we did, maybe we didn’t” approach is a smart strategy (within the context of doing incredibly stupid things like engaging in FX market intervention battles in the first place) - because when at war with markets who will relentlessly test the resolve of a non economic actor attempting to fix prices, you hide as much of your intent and capacity to act as possible. This is the exact same tactic that BOJ is pursuing with their latest YCC-C (yield curve control control) - as they removed the 50bps hard line upper band on JGB yields and replaced it with a “flexible range” in which JGB buying operations would be conducted.
Uncertainty is the price fixer’s advantage, and the market participants’ problem - and the former should try to manufacture as much uncertainty fog as possible.
And for this reason, USDJPY 150, the self-created market consensus “line in the sand” level, would actually NOT be an intervention level. I may not have a clue as to what the MOF’s actual level of tolerance is, but I can confidently cross off what specific price level it is NOT: USDJPY 150 - simply because it’s too “obvious” a round number level for which too many are focused on, or positioned for.
Tolerance Level: Price or Volatility?
Many argue that MOF is not looking at any specific price level as an intervention trigger point, but rather, they are watching volatility, or speed of the move instead.
While I agree that realized volatility is certainly a key factor carefully monitored by MOF officials, I absolutely believe that price levels matter equally as much as volatility, if not more.
For the record, MOF Vice Minister Kanda (Japan’s “chief currency diplomat”) has also publicly stated this very notion of volatility himself - not that I ever take anything that comes out of Kanda’s mouth in a public venue at face value. Vice Minister Kanda and Finance Minister Suzuki are basically the used car salesmen of the developed economies financial policy.
In fact, let me share with you the latest from Kanda-san, as he actually said something new regarding volatility conditions that would warrant intervention.
This is Kanda talking to (ambushed by) the press on October 4th for his second round of commentary on the day following the 150 shot.
Now, you’re probably thinking why the hell did Weston include a 10 second video clip in Japanese (with Japanese subtitles) knowing we don’t understand him…
And the reason is because, you, non-Japanese speaker, are actually on the same page as the rest of us who understand Japanese, AND understand finance - NONE of us know what the hell he just said, and it’s not due to a language barrier. So, whatever gibberish you just heard and are left with nothing - welcome to the club of “…k. Helpful, thanks…”
He is asked to define the parameters of what he means by “volatility” that would justify yentervention, specifically regarding time horizon (large price movements in JPY over what time frame?)
“…could be 1 day, 1 week, 1 month.. more even. For example, if year-to-date, JPY makes a 20 yen move, that could be grounds to intervene.”
Ok, this is new. As in, something he hasn’t ever said explicitly- BUT, it’s not at all new in the sense that it’s literally more of absolutely nothing.
That last line- the “example” he gives of “a year to date 20 yen move (in USDJPY)” - well, guess how much USDJPY has moved from the start of 2023? 20 yen.
And THAT, he says, is also what is considered “volatility” - and enough of it to warrant yentervention. His precious yentervention.
So let me rephrase - I reject this notion that price level and volatility are mutually exclusive factors in triggering yentervention.
It was markets this time, not MOF
Again, we will find out for sure at the end of the month, when MOF intervention data is released- which also happens to be BOJ day.
My assessment - I’m highly confident this was purely markets.
Futures Short Squeeze
120k ($100 billion notional volume) of the day’s total 280k JPY futures contracts traded within 1 ½ hours. And when all was said and done for the CME close, -5,000 contracts of the Dec23 JPY futures open interest had been closed out. This was position exiting - shorts
Another Shot Fired, Another Brush-Off
Fast forward to October 17 around 7pm JST, when we saw similar price action in USDJPY:
Although not to the same degree of a move as the aforementioned 150 → 147.33 → 149.50 flash crash from earlier this month, this too was an instant plunge and recovery back to flat on USDJPY - blink, and you’ll miss it.
What triggered this one?
release “leak” citing BOJ officials “people familiar with the matter” who say that the BOJ will once again revise their core CPI outlook closer to 3% for this fiscal year from 2.5% current, and FY24 projections from 1.9% current to 2% or more when they release their latest economic outlook at the October 31 policy meeting. And, if true, this would make for 3 consecutive years in which BOJ’s own inflation estimates exceeding their 2% target.
Once again, here was the market reaction - this chart includes both the USDJPY > 150 flash crash, and the BOJ CPI revision “leak” reaction
Markets are extremely jumpy at these levels. MOF wants markets to be, and wants markets to wonder if it was yentervention or not. Don’t play into their hands and automatically jump to a yentervention conclusion. Markets buy into narratives with alarming ease- but sometimes exploitable ease.
Either way, this is a market-self-imposed USDJPY 150 ceiling - meaning, the market can also clear itself of resting USDJPY sell orders north of 150, making the wall of resistance flimsier with each attempt to break out, until it breaks out, and blasts higher.
Disillusioned as they may be, market forces are the ones creating major price dislocations- and so when markets realize that there are no adults in the room, they may tear the roof off 150.
What if it WAS MOF?
IF the Oct 3rd move from 150 → 147 → 149.50 (and now back to 150) WAS MOF conducting official yentervention, then here is what I’ll add:
BEWARE of an ACTUAL and MASSIVE yenterevention in the next few days before the end of October.
Because if MOF yentervened on Oct 3rd this month, all they were able to buy with their tens of billions of USD was literally 30 seconds of JPY “strength” before reversal- then they CANNOT show up on the data at the end of the month as having yentervened, as it would show that their yentervention effort was absolutely ineffective. And then the yen gets destroyed, no matter how much MOF tries to throw at the markets in the near term.
Monthly yentervention data releases are presented as a simple, aggregated total for the month, as such:
(if this was an intervention month, it would say ¥____,____ amount)
And so, if MOF had a pitiful yentervention attempt in early October, they have a few days left to cover that up, and absolutely blast USD in tens, maybe even over 100 billion USD worth, to a) yentervene and impact the market, but b) more importantly, cover up that first early October attempt, and just pretend that was not MOF - as there are no specific details of how much, on what dates etc.
And if they do this- then at what level? Who knows or cares - MOF certainly would not care about a specific level, they would only care to blast the market and show what they did on paper.
And with BOJ right around the corner- and press testing happening almost daily, watch for a potential big USDJPY move prior to the meeting in the coming days, or upon BOJ itself - but I actually don’t think that’s how the timing would play out.
I suspect that JPY may just stay in self confinement around 150, capped below the Oct 2022 cap of 151.96 for the next week until BOJ, and perhaps even underwhelm volatility upon BOJ meeting day. And this rangebound call on the immediate term stands almost regardless of just how much US yields continue to rise or not.
But AFTER BOJ, and also almost regardless of what comes of BOJ (which will be for a different video altogether), this is when I believe we will see the major USDJPY move- and to the upside. If we break 152 and US yields are still high, we’re at 155- 160 and beyond, the only thing stopping this would be actual and clearly announced yentervention.
And until that happens, as USDJPY hits mid 150+, that’s EURUSD plummeting toward parity, and that’s USDCNH blown up thru 7.5. And THAT would be a disaster.
How To Trade This?
Here is the real, honest and direct answer: I have approximately zero clue, neither does anyone else, and for good reason. These are not freely trading markets moving to the beat of international macro market fundamentals - these are markets that are either directly intervened into, and/or perceived to be intervened by Japan state actors at Ministry of Finance on FX, or Bank of Japan on JGBs.
And I’ve got news for you- the folks who themselves are the goal post movers and price setters at MOF and BOJ - they may know what they will or won’t do, when, at what price level, for what notional amount, but they don’t have a clue what the market reaction will be, for which their subsequent market meddling agenda will be dictated by. So, how are we, the non-employed by MOF or BOJ, to have a clue as to what green and red blinking tickers will do?
We don’t, and that’s fine. We don’t need to “know” in order to take a market view or position, and we should at the very least be cognizant of what is occurring and what forces are at play from as many facets as possible.
As per Across The Spread’s purpose- I will continue to (attempt to) provide the yentevention angle on the broader U.S. and global yield story underway, or the carry trade and risk assets story underway, or any other tie in. And of course, all subject to be entirely wrong, let alone subject to change.
Thank you for reading. This is still experimental in format- and this particular note was written over days, hence the lack of structure.
I will also start experimenting with short, intraday market notes to follow up on these longer pieces, as developments unfold.
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