Yen’s Brief Spike Leaves Traders on Alert for Intervention

Japanese yen coins Photo by Akio Kon /Bloomberg

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(Bloomberg) — A sudden surge in the yen ensured traders remained on edge over the potential for Japanese authorities to step back into the market after last week’s intervention to curb declines.

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The currency strengthened as much as 0.8% to 155.72 per dollar in a thin holiday session in Asia, before retracing most of those gains and steadying just above 157. The spike came after Japan likely spent around ¥5.4 trillion ($34.5 billion) last week to support the yen — a warning shot to traders after it had weakened past 160 per dollar.

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Japan “is well known for multiple short-term follow-ups beyond the initial intervention to show the market they mean business,” said Eugene Epstein, head of trading and structured products North America at Moneycorp. “As such, dollar-yen has been on a knife’s edge waiting for the next bazooka.”

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Speaking to reporters at an international conference in Uzbekistan Monday, Japanese Finance Minister Satsuki Katayama said Japan can take bold action versus speculative foreign-exchange movements. Earlier, Katayama had no comment on whether Japan intervened in currency markets. Last week, she told reporters that people shouldn’t put their smartphones down during the holiday break, hinting at action at any time.

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It’s not clear whether Monday’s moves reflected another intervention given that “low levels of liquidity due to the Golden Week holiday will lead to exaggerated moves,” said David Forrester, senior strategist Credit Agricole CIB. “It will be worth paying attention to the 157 level in dollar-yen as the exchange rate has struggled twice just above that level post the reported intervention.”

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Even as officials sidestep questions over recent market moves, attention is turning to how much capacity Japan has to counter yen weakness. According to analysts at Goldman Sachs Group Inc., the nation has firepower to intervene 30 times at last week’s scale, though officials are expected to guard their reserves and step in at more effective moments.

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Goldman and other major banks, including TD Securities, expect that Japan’s Ministry of Finance remains focused on the 160 per dollar mark for the yen. 

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The defense of that level “should deter further speculative shorts in the yen and keep it choppy around current levels,” said Jayati Bharadwaj, head of currency strategy at TD.

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There were signs Monday that the Bank of Japan’s action to prop up the currency has prompted an unwind of bearish positioning. Options traders have added to yen-bullish bets, with short-term positioning most stretched since January. Analysts at Morgan Stanley similarly noted a rise in long positions in the currency options market since last week. 

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Barclays Plc strategists including Themistoklis Fiotakis said the chance of intervention will support the yen in the near term, as will the likelihood of an interest-rate hike in June. The Bank of Japan kept its key rate unchanged last week, though the vote split was 6 to 3 — an unusually high number of dissenters, boosting expectations for a move next time round.