What Historic BOJ-Fed Intervention Means for Forex Markets
Friday was a momentous day for forex in general, but particularly for the USDJPY. After the pair dropped over 500 pips in a matter of hours, the Japanese and US officials confirmed they had intervened in the exchange rate. There are several major things happening all at once that opened a lot of forex traders’ eyes in surprise.
- First, was the confirmation itself, since it’s standing policy at the BOJ and Japan’s Ministry of Finance (MOF) to not announce interventions. The times it has happened in the past have all been seen in the currency move without any official statement.
- Secondly, the fact that it was the Fed doing the intervention, the first time in over 15 years. The last time the BOJ and Fed coordinated on intervention was the extraordinary situation following the 2011 Fukushima earthquake. Outside of an emergency, it’s been over thirty years since the Fed has stepped in to prop up the yen.
- And third, something that seems to have gone under the radar, is that the Fed used Euros to conduct its operation, which has important implications for the ECB. Lets go by parts.
A Warning to Markets
The last time the BOJ intervened, it was around the 162 handle. The USDJPY drifted to almost 164 this time before the intervention, after repeated verbal warnings. This suggests that policymakers are setting a higher ceiling for the currency pair in line with their rhetoric that the yen is weakening too fast.
That both sides immediately confirmed the intervention and said they would do further as necessary is likely a warning to the market not to try to push through the level again. The Fed intervening is seen as the “big guns”. BOJ interventions are fairly limited, because Japan has a fininte number of dollars it can sell to buy yen. However, the Fed has technically unlimited dollars, which means it can outsell any institution that tries to preserve the carry trade.
Why the Euro?
However, the Fed didn’t use its ultimate weapon. Instead, it sold Euros to buy yen, and roping in the ECB, because that action would weaken the Euro instead of the dollar. The ECB has the same interest as the Fed in not wanting the yen to get too weak, and this is a way that both can effectively put a floor under the Japanese currency.
Because the BOJ has such low rates, the yen is a primary borrowing currency for investors in other assets, like US and European stocks. Which is why stock markets also tanked around the same time as the intervention happened. Japan’s low rates are fueling the carry trade, which would only increase if the ECB and Fed raise rates while the BOJ does not.
What it Means for the Yen
The other aspect of the Fed using Euros instead of dollars is that it means it still has its ultimate weapon in reserve. This was, essentially, a warning shot to traders trying to push the USDJPY higher. If anyone tries to trade the pair above 164, they will lose money, is what they are trying to convey.
The question now is whether the market cooperates or tries to challenge the Fed. So far, the yen has remained strong. But intervention cannot erase fundamentals, and the BOJ will now be under increasing pressure to raise rates to at least balance the gap with the ECB and Fed.
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