US FX WRAP: Yen firms again amid touted intervention
The Dollar was mixed against G10 peers on Friday, with the Yen the clear outperformer, dragging the Buck lower and extending on Thursday's strength, while the Swissy was the distinct laggard. Yesterday, traders suggested that the NY Fed carried out rate checks on spot USD/JPY on behalf of the Treasury, while WSJ, citing sources, said today that the US Treasury Department has informed banks that it might make currency trades on Friday to support the JPY and strengthen its exchange rate against the dollar. The report sources added that some banks were told to have executable trades ready to exchange Japanese yen for euros. Elsewhere, we got reasoning from the three Fed dissenters, while 2027 voter Barkin said it's a 'close call' whether rates are high enough to bring inflation down, and he didn't know whether he would have joined three fellow regional Fed presidents who voted this week for higher rates.
As mentioned, the Yen was firmer and was the talk of the town again on Friday as more choppy price action was seen, as USD/JPY traded between 158.15 and 160.88. Following the aforementioned gains on Thursday, Nikkei sources suggested Japan and the BoJ intervened via USD selling, while desks conducted rate checks. In addition, the BoJ kept rates unchanged at 1.00%, as expected, with Takata dissenting for a 25bps hike. Guidance was largely unchanged, though the Outlook Report saw slight GDP upgrades and mixed CPI revisions. Ueda’s presser triggered only modest moves, with some upside seen on comments about inflation risks and policy flexibility.
Elsewhere in G10 FX, market-moving headlines were fairly contained, with currency-specific catalysts light. Antipodeans and the Pound managed to eke out slight gains, while the EUR was flat and CAD was marginally lower. For the Pound, BoE Chief Economist Pill stated that the MPC is not edging towards a hike, and Deputy Governor Lombardelli clarified the decision to hold rates unchanged this time was not a difficult one. Pill sees potential for more slow-moving, insidious second-round effects.
Lastly, China’s PMIs unexpectedly fell into contraction, reinforcing concerns over the recovery pace post-Politburo, although the Yuan reaction was muted.
Rate checks by the New York Fed on behalf of the Treasury, followed by press reports that banks were told to have executable trades ready, fit the established escalation ladder that has preceded past yen-support operations: verbal jawboning, then rate checks, then actual selling of dollars. Historically the checks themselves have moved USD/JPY more than the first intervention ticket, because the signal that authorities are prepared to act re-prices the one-way positioning that carried the pair to these levels in the first place. The distinguishing feature here is the reported US side of the operation, coordinated or US-executed yen buying, including instructions to ready yen-for-euro trades, which in past episodes of this kind has been read as more durable than unilateral Japanese action, since unilateral sales have tended to fade once the MoF's ammunition question resurfaces. The BoJ's unchanged stance with a single hike dissent leaves the rate-differential channel doing the heavy lifting, and prior intervention cycles have shown that operations buy time but rarely turn the trend unless the differential itself is narrowing, which is why Fed commentary of the kind delivered by the dissenters and Barkin matters to the follow-through. Tells worth noting are whether actual tickets confirm the checks, the size and frequency of any operations, and whether the pair re-tests the upper end of the cited range on thin liquidity, the condition under which authorities have historically preferred to strike. The muted yuan response to contracting PMIs underscores that this remains a yen-specific story rather than a broad dollar move.