Sinking Japanese yen keeps the US dollar king
2022.04.19 12:11
- Yen losses accelerate – will verbal intervention be enough?
- With euro also in the gutter, dollar cements status as FX king
- Stocks trade sideways ahead of crucial earnings releases
Yen approaches danger zone
The losses in the yen have snowballed into an avalanche, with the currency getting buried under the weight of monetary policy divergence and Japan’s reliance on imported energy. Dollar/yen sliced its way above 128 and seems to be headed towards the 130 region, which is the line in the sand for FX intervention according to former government officials.
However, intervention is not the optimal choice. Europe and America won’t agree to weaken their own currencies to prop up the yen since that would exacerbate inflationary pressures, which means the probability of success would be low and Tokyo would need to burn through its FX reserves.
A much safer and cheaper solution would be the Bank of Japan raising the ceiling on Japanese yields or scrapping it altogether. That would allow domestic yields to play some catch up with the global rally, narrowing the yen’s rate disadvantage. Any good news on Ukraine could also help stop the yen’s bleeding by cooling commodity prices and, by extension, bets of rapid-fire rate hikes abroad.
For now, the spotlight is on the 130 line in dollar/yen. If that barrier is violated with considerable momentum, the next technique in the intervention playbook would be for Tokyo to characterize the move as ‘disorderly’ and ‘one-sided’.
Euro under pressure too
The euro can’t catch a break either. With the spike in energy and food prices eating into real incomes while the slowdown in China threatens demand for exports, the European economy is losing power and a recession cannot be ruled out. Consumer surveys have already rolled over and if the PMIs follow suit on Friday, that could open the trapdoor for euro/dollar towards the pandemic low of $1.0635.
The French presidential TV debate on Wednesday will also be crucial ahead of the second voting round on Sunday. Opinion polls are running at 53% for Macron against 47% for Le Pen, which is close enough for the debate to make a difference. If the race tightens any further, the euro could remain under pressure heading into the weekend as investors hedge against election risk.
Dollar shines, earnings in focus
With the yen in freefall and the euro in the gutter, it is no surprise that the US dollar continues to bulldoze its way through the FX arena. The US economy is much healthier and will weather the impact of the energy shock much better, allowing the Fed to really slam on the brakes to tackle inflation.
The Fed’s arch-hawk, James Bullard, said he wouldn’t rule out a 75bps rate increase and that he is open to a ‘reverse twist’ that would raise longer term rates by unloading bonds of those maturities faster. Traders know he is an outlier in the FOMC so there wasn’t any reaction, but his comments underline that the Fed’s hawkish shift may not be complete just yet.
Finally, Wall Street struggled for direction yesterday. The S&P 500 closed virtually unchanged, biding its time ahead of a slew of earnings releases today that could set the tone for the entire reporting season, including from Netflix (NASDAQ:NFLX), Johnson & Johnson, and Lockheed Martin (NYSE:LMT). 
