The JPY staged a sharp and rapid rally overnight, with USD/JPY tumbling from 163 to below 160. The Nikkei reported that the Japanese government has intervened to buy JPY and sell USD, and that the US authorities have also executed a rate check in markets, which is a precursor to intervention. This is the first JPY buying intervention that has no strong verbal forewarnings by the Japanese authorities, but we have consistently cautioned on the risks of intervention with USD/JPY being above 160 and the interventions seen in April-May. Both Finance Minister Katayama and top currency official Mimura have refused to confirm an intervention, indicating a change to an opaque strategy.
Risks of interventions have now overtaken the BOJ meeting today in terms of importance for USD/JPY, with the BOJ expected to keep rates on hold and guide for more rate hikes. Follow-up interventions are likely if JPY is to give up its gains given the authorities’ need to maintain credibility, ample FX reserves, and a broadly weaker USD following the FOMC’s decision to hold rates this week. US Treasury Secretary Bessent appears to support Japanese interventions, stating that JPY seems very undervalued, had substantially overshot its equilibrium price, and that he is not concerned about JPY strengthening against the USD. Our DEER model shows JPY as the most undervalued across major currencies.
USD/KRW has softened towards 1430, with the KOSPI having corrected over 30% from its peak. Foreign equity outflows from Korea have tapered off substantially since early July following the start of the KOSPI correction, negating a technical factor that has weighed on the KRW. This explains a negative correlation between the KRW and KOSPI, but we expect this correlation to diminish over time as speculative excesses are wrung out, with the KOSPI having eased to its 200d moving average. Despite the sharp KOSPI correction in July, we do not see the economy as being in a weak state and maintain our optimistic view for the KRW.
Quote of the Day
“If you want to be the best, you have to do things that other people aren't willing to do.”
Michael Phelps
July 31 in history
In 2012, Michael Phelps became the greatest medal winner in Olympic history as part of the winning American 4 x 200 m freestyle relay team in London, earning his 19th career Olympic medal and 15th overall gold.
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