The Prospect of Yen Intervention

May 5, 2016

We should not be surprised that the yen is taking a breather after the out-sized moves at the end of last week. During the generally weaker dollar phase seen over the past 24 hours, it’s the only major currency to have weakened against the Greenback. Should we worry about BoJ intervention? It’s certainly something to consider, given the extent of the recent moves. Central banks find it very difficult to fight the underlying trend in markets; even the might of a central bank balance sheet often fails to counteract the underlying will of the market and fundamentals. That said, what often worries central bankers more is the speed of moves. Of the G10 currencies, the pace of appreciation has been twice that of most others since the end of January. So from a valuation perspective, the case is weak, given that the yen remains undervalued on many longer-term measures. On the pace of appreciation, the case is stronger, but the effects of this are more likely to be temporary given that the intervention would go against the underlying trend of the market.

Looking ahead to today, it seems that most markets are likely to be in a holding pattern ahead of the US jobs data tomorrow. We’ve seen USDJPY and other majors move away from the lows and highs marked out earlier on in the week. Sterling will be looking at the services PMI data at 08:30 GMT after the weaker manufacturing numbers earlier in the week, which suggested some restraint on the part of firms ahead of the EU referendum next month. Otherwise, we’re likely to see markets holding back ahead of the US Employment Report tomorrow, where the ADP data yesterday suggested a weaker headline reading. We’ll see…

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