USD/JPY: Intervention threat caps upside – MUFG

MUFG’s Lee Hardman notes that Japanese Yen strength has persisted as USD/JPY pulled back toward 156.50 on Monday, with policymakers stepping up verbal warnings on currency weakness and signalling readiness to intervene. Coordination with US officials and a faster Bank of Japan hiking cycle are seen limiting further USD/JPY gains, helping the Yen outperform other G10 currencies in the near term.

Yen supported by policy signals

"Overall, the comments from Japanese officials at the start of this week continue to send a strong signal that Japan is prepared to intervene against to support the yen."

"They are also encouraging speculation that Japan will also make other policy adjustments to provide more support for the yen such speeding up the pace of BoJ rate hikes under pressure from the US."

"The BoJ has already sped up the pace of hikes this month (every three months) and signalled that a faster pace of hikes is likely to continue heading into year end."

"We expect the next hike to be delivered in December while the Japanese rate market is attaching a higher-than-normal probability (~36%) to a back-to-back hike next month."

"The latest developments are helping to cap further upside for USD/JPY even as the US Dollar strengthens broadly."