The sharp drop in USD/JPY from 159.50 to 156 on Monday without any news has all the signatures of a market intervention, barring an official confirmation. Ahead of the FOMC, USD/JPY is unlikely to retest 159, which markets will take as the revealed trigger level for intervention. We had cautioned readers last Friday that interventions risks were becoming significant. Still, Japan not firing a shot across the bow before the purported intervention, and Vice Minister Kanda’s subsequent refusal to confirm if intervention had occurred or not, are both unexpected and suggest that Japan is changing its intervention strategy compared to 2022. Kanda did say that recent FX moves seem excessive, which is a hint that action is warranted.
We believe Japan’s refusal to publicly announce intervention is to pre-empt markets from overly focussing on a certain JPY level, thus giving it flexibility to shift intervention points as needed without incurring credibility loss. The downside would be a reduced ability to guide markets towards self-restraint, but risks of a decidedly more hawkish FOMC stance later this week mean that a higher USD/JPY intervention point could become appropriate. Finally, intervention on a Japanese holiday underscores Kanda’s point that Japan can respond to forex 24 hours a day, and thus Mrs Watanabe retail traders and Nikkei investors will have to watch risks over their holidays too.
Eurozone inflation and Q1 GDP will be due today. While Eurozone headline inflation is expected to remain stay firm due to the withdrawal of energy price measures, core inflation should continue to ease, supporting the case for the ECB to begin its rate cut cycle in June. Eurozone Q1 growth is also likely to languish around 0.2% y/y (Q4: 0.1%), and EUR/USD could ease slightly below 1.07 amid a still soft growth outlook.
Australia’s private credit and retail sales takes on more importance for the AUD. With trimmed mean inflation being sticky at 4.0% in Q1, a 2H RBA rate cut has become less convincing. On the other hand, any unexpected upturn in the domestic data with strong credit growth and a rebound in retail sales could bolster market expectations of an RBA rate hike. China’s manufacturing PMI today also has scope to impact AUD, but to a lesser extent. Chinese industrial overcapacity is an ongoing issue, and there is lesser risk for a vigorous expansion. We see some scope for a further easing in EUR/AUD.
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