An interesting JPY setup

A thought

In July 2024, USDJPY was making new highs above 160.00 and the world was freaking out about a potential JPY crisis. The MOF intervened on July 11 and July 12 and then the BOJ hiked rates on July 31. That sequence of events took USDJPY from 161.85 to 142.00 in less than a month as it was followed by a surprisingly weak jobs report (4.3% vs. 4.1% expected Unemployment Rate). USDJPY spent the rest of 2024 recovering back to 158.00 before it swooned back down to 140.00 on Liberation Day.

The hike in July 2024 is the only real surprise hike from the Bank of Japan in recent memory, though there have been other policy tweaks that came as a surprise. The biggest one was when the BOJ widened the YCC band on December 20, 2022, again shortly after three MOF interventions in September and October 2022.

Now, you have a 40-year low in the yen, a recent intervention (late April and early May), Katayama talking about bold action, Takaichi asking GPIF to turn the boat a bit, falling government approval ratings, nothing priced in for BOJ, and a market mega long USDJPY on a fairly simple (but logical) thesis: Loose fiscal/loose monetary.

The key thing to note here is that BOJ surprises tend to follow interventions.

There are some differences from the 2023 and 2024 experience. First of all, 5 out of 56 economists were calling for a rate hike at that July 2024 meeting whereas exactly zero are calling for a hike next week. Another difference is that the July 2024 hike did not go particularly well—the Nikkei sold off 9% or so afterwards.

So, this is new information that might scare the BOJ if they were considering a hike next week. Finally, USDJPY hasn’t rallied that much. The level is high, yes, but the rate of change is fairly slow. Here is the same chart as above except I replaced the USDJPY price with 3-month runup and drawdown in USDJPY.

So maybe things are not as urgent? It’s hard to say. If things were not urgent, why would Katayama keep using the bold action language?

As Simon Flint has pointed out that Tobias Harris has pointed out, the Takaichi government is becoming less popular. If they feel any of this has anything to do with inflation and the weak yen, they might be motivated to take some actual bold action. There is little doubt that part of the popularity problem comes from cost-of-living concerns.

To summarize all this: Takaichi is in a tough spot, Katayama is chirping, GPIF is being asked to turn the ship a tad. Positioning, price action, and sentiment are one way. Nothing is priced in. The past two MOF interventions were followed by surprise tightening from the BOJ. I am generally anti-lottery ticket because of favorite/longshot bias and because lotto tickets are usually exciting but negative EV. But sometimes lottery tickets are positive EV! To be perfectly honest: I did not think any of these things before I started typing this morning. I write to find out what I think. The idea just kind of came together here so I want to let it percolate over the weekend before putting on any trades. Let me know if you think it’s a bad idea or a good idea—sometimes reader feedback can help me determine whether I am barking up the correct or incorrect tree.

Regardless, it’s an interesting setup.

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Calendar

This week’s calendar was weak and next week’s is strong. You have three central bank meetings, double month end, Aussie CPI, and four megatech earnings releases. Whatever you trade, it’s a good week to be at work.

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Final Thoughts

AUD and CHFJPY both not really working or not working so far. Mildly encouraging price action so far. I hope your weekend is not blue. If you were promised a signed copy of Trade Outside the Box—they have shipped! Foreign shipping takes a long time, so please be patient.

Check out the new EU banknotes and share your opinion on the ones you like and don’t like.

https://surveys.ecb.europa.eu/10b/neweuro/

This design is unfortunate as it makes it look like Marie Curie is a man with blue hair.

Speaking of unfortunate blue haired men. Here’s me in 2001.

Hi Jen!

good luck ⇅ be nimble