The main currency and policy bodies met on 29.01.2018
Japan Currency Head Asakawa:
-Will continue to monitor FX market closely; checking what is behind moves;
-should avoid FX competition; (in-line with G7 rhetoric)
– Reiterates that will not target FX for competitiveness
– Reiterates that excessive, disorderly moves have bad effects
– FX volatility has increased – Watching for nervousness or speculative moves
– BOJ confirmed to continue its easing until inflation target was achieved
– Digital currencies were not on agenda today (meeting between BOJ, MOF and FSA)
Chief Cabinet secretary Suga: Important to watch currency moves.
This meeting is not very surprising actually as there have been enough reasons to hold a brainstorming session in January alone. In the past Japan needed to counter the deadly deflation spiral and by times heavy speculation. Relatively straight forward( by no means easy) with a set path of warnings to be sent out : watching the markets, against fundamentals,speculative moves,checking rates,excessive, disorderly and highly speculative were the crescendo in wordings , the latter being the final fagging before stepping in.
We are far far from any consideration of intervention here. I can see 7 immediate reasons why they met:
1. The market reaction after the JGB buying down scaling
2. The Trump/Mnuchin dance on the USD last week.
3. The decorrelation of JPY vs yields/equity markets past month
4. ECB’s stance on the Euro/ SNB stance on CHF/ China’s stance on Yuan
5.Show the market they are vigilant not to let JPY derail inflation efforts by spitting out the warning lines.Ahead of the curve(ball)
6. Not in the least the reaction to Kuroda’s Davos one liner, to which my Harry Hindsight says it was a planned little test .
7. Are we close to the monetary policy shift? That’s still very speculative at this stage but they will have heard and read the markets.
This is mainly a USD driven move . The meeting participants must have understood as much looking at the JPY basket value against non-USD currencies, which is equal to weaker compared to a few months ago. Of course USDJPY is the main yardstick and the world focuses on it but there’s not a lot they can do if USD loses its shine, as in deteriorates on the global reserve status front. As long as the decline, if it does continue, goes orderly and JPY doesn’t outperform the non-USD currencies, the warnings should remain at the “watching” and “investigating” stage.
Don’t overestimate the excessive moves, speculative investigation lines for now, they are a standard part of Japanese wordings when they talk about the currency.
I can imagine they will have some levels in their mind , as in 100-95-90 being psychologically important and there will also be a level where they will judge it is counterproductive to the inflation “mindset” Kuroda talks about in each of his interventions, Davos being the prime example.That level to me will be depending again on how the USD performs overall and how ECB, SNB and let’s not forget China are positioning . So far so good though, China is revaluing the Yuan gradually, ECB is cautious in not putting an end date to the APP program but there’s no panic yet and SNB well they’re mostly concerned about EURCHF .
The decorrelation of the JPY versus traditional moves has everything to do with the robust recovery of the Japanese economy, global rallying equities, US isolation moves on international trade deals and expectations of the YCC being a bit relaxed later. It will have drawn their attention but in my view is not a case for immediate action as we see similar moves in the other major countries.
So to anticipate their next meeting,warning signals, moves, I reckon we need to monitor this set of signals in the upcoming months.
Spring is still my prediction period for when we can see a shift, if not in hard policy terms, at least in the expectations management, a further JGB buying down scaling and a slow, subtle relaxation of the YCC.
I am still small flexible short USDJPY , opportunistically go with the ebb and flow of the price action for now, especially this week being cautious with month end/Fomc/ Us labour report, But for as long as the USD doesn’t show more pro-eminent signs of recovery, I don’t see the need for an change in strategy.
USDJPY should find it tough to sustainably recover above the 110-111 handle in the medium term.