Geoff Yu at BNY highlights that USD/JPY around 160 has become a credible deterrent level for FX participants, even without clear evidence of official intervention. He notes that recent Yen weakness and Bank of Japan (BoJ) communication about a possible rate hike have not revived foreign demand for Japanese assets, and advises against chasing USD/JPY above 160 given limited FX-specific risk impact.
FX moves seen as secondary risk
“We have highlighted in recent weeks that fixed income volatility is the most important driver in cross-asset volatility, including FX. Questions over fiscal dominance – of which Japan is one of the most exposed names – are directly driving JPY weakness and shaping central bank and finance ministries’ reaction functions.”
“FX markets are no different, especially as JPY weakness is seen as a lack of credibility in both monetary and fiscal policy. Lower Nikkei levels and the drop in foreign portfolio flows suggest these factors are already in place.”
“In contrast, USD/JPY went on a near-unbroken run from 155 to 164 between May and July but generated very little impact on cross-border asset interest.”
“Based on official Bank of Japan (BOJ) data, JPY’s sharp moves from mid-week onward aren’t based on official intervention. If so, this is the first sign that the 160 level in USD/JPY has been established as a credible deterrence level for FX market participants.”
“FX-specific risk, such as the moves this week, don’t add to risks on the margins. U.S. Treasury Secretary Scott Bessent stated after the July round of intervention that any activity wouldn’t be to the detriment of the U.S. Treasury market.”
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
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