Yen surges higher on back of imminent intervention risk

JPY: Coordinated intervention risk fuels surge higher for yen

The yen has continued to strengthen during the Asian trading resulting in USD/JPY falling to low of 153.81. It marks a sharp turnaround for the yen after USD/JPY hit a high of 159.23 on Friday following the BoJ’s latest policy meeting. The sharp strengthening of the yen has been triggered by heightened concerns amongst market participants over the risk of direct intervention. The yen’s upward momentum has been reinforced at the start of this week by a warning from Prime Minister Takaichi who stated “It is not for me as prime minister to comment on matters that should be determined by the market, but we will take all necessary measures to address speculative and highly abnormal movement” during a television debate among party leaders on Sunday. Japan’s top currency chief Atsushi Mimura has stated overnight as well that “we will continue responding appropriately against FX move, working closely with the US authorities as needed, in line with the joint statement issued by the Japanese and US finance ministers last September”. He added that he had “no intention” of responding to speculation in the market that officials conducted rate checks on Friday.

The yen strengthened sharply late on Friday after reports that the Federal Reserve Bank of New York had contacted financial institutions to ask about the yen’s exchange rate. The report has fuelled speculation that direct intervention could be imminent, and could even involve joint intervention with the US to buy the yen and sell the US dollar. Japan and the Trump administration have both expressed concern over yen weakness. Treasury Secretary Bessent has previously called on the BoJ to speed up monetary tightening to address yen weakness which could be one stipulation for the US to take part in coordinated intervention with Japan. The rate checks came shortly after Finance Minister Katayama had warned on Friday that Japan was “always watching with a sense of urgency”. She added overnight that “we have a memorandum agreed between Japan and the US last year, and we are acting base don that framework. We are watching market conditions closely very closely with a sense of urgency”.

Speculation over the risk of joint intervention between the US and Japan has already proved effective in the near-term in helping to reverse yen weakness with USD/JPY falling back to the lowest level since early November although it is still around 7 big figures higher than at the start of October when the recent yen sell-off was triggered by domestic political developments in Japan. The release of the latest IMM report revealed that short yen positions held by Leveraged Funds has almost doubled over the last coupe of months. The scaling back of elevated short yen positions and alongside broad-based US dollar weakness are weighing on USD/JPY, although doubts will remain over the sustainability of yen strength given fiscal concerns in Japan  have not been addressed ahead of the upcoming lower house election on 8^th February.  

INTERVENTION RISKS ENCOURAGING SCALING BACK OF YEN SHORTS

Source: Bloomberg, Macrobond & MUFG GMR

GBP: Optimism over UK growth pick-up provides support amid political risks

The pound has continued to trade at stronger levels overnight after outperforming at the end of last week. Cable has risen to a high overnight at 1.3683 as it moves back closer to last year’s high at 1.3789 from the start of July. Similarly, EUR/GBP has dropped back towards support from the 200-day moving average at just below 0.8650. The pound’s upward momentum was triggered by the release of the much stronger than expected UK PMI surveys on Friday alongside the broad-based US dollar sell-off. The PMI surveys revealed that business confidence in the UK rose sharply at the start of this year lifting the composite PMI to the highest level since August 2024. It provides further evidence that the UK economy is picking up after budget uncertainty held it back in the autumn. In recent years the UK economy has recorded stronger growth in Q1 before slowing throughout the rest of the calendar year. It has prompted market participants to scale back BoE rate cut expectations. The timing of the next BoE rate cut has been delayed until April.         

At the same time, political risks in the UK have attracted market attention triggering a temporary pound sell-off late last week. Manchester Mayor Andy Burnham applied to stand as Labour’s candidate at the upcoming Gorton and Denton by-election, but was rejected by the National Executive Committee after Prime Minister Starmer told the panel it would trigger months of “psychodrama”. While the decision could trigger some initial relief of the pound, the decision could backfire if Labour loses the by-election to Reform and then performs poorly in the local elections. A development that could increase the risk of the prime minister facing a leadership challenge in May from potential candidates other than Andy Burnham who will not be able to challenge given his is not an MP. We continue to believe that the local elections pose downside risks for the pound, and are not convinced that stronger growth will prevent the BoE from lowering rates further this year if inflation falls back closer to target as we expect.   

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com