The relentless selling of U.S. dollars after Wednesday’s FOMC announcement took USD/JPY into intervention territory and like clockwork, the Bank of Japan responded by bidding up USD/JPY shortly after it hit a fresh 16-month low. In a matter of minutes right around lunchtime in the U.K., USD/JPY jumped nearly 100 pips from its low of 110.67. This is the third time in 2 months that the BoJ stepped in to buy USD/JPY below 111 as they clearly don’t want to see the currency pair trading on the 110 handle. The risk of additional intervention is heightened by counter positioning – according to last week’s CFTC report, yen longs are at the highest level since the financial crisis in November 2008. While the Bank of Japan sounded less pessimistic at this week’s monetary policy meeting, the recent climb in the yen changes things completely. Japanese policymakers may have been looking for the Fed to do the heavy lifting – but Yellen failed to deliver and now the risk is to the downside for the dollar. The ball is in Japan’s court and not only do we expect more jawboning of the currency in an attempt to drive the yen lower, but Japanese officials could take this opportunity to remind investors that rates could be lowered again. At 113, the BoJ has leeway to wait but at 110-111, with the risk of further losses in USD/JPY, they may not be able to forestall easing for much longer. Yen strength is a big problem for Japan’s export sector, especially in an environment of slower growth in China and the Eurozone. If USD/JPY drifts lower again, we expect more aggressive action from the Bank of Japan.
