Japanese officials failing to jawbone the Yen lower; NZD/JPY traded above PPP estimates for last 14-years; USD sentiment perks up

By Jason Wong

The Yen has continued to strengthen, while the USD has also made some broadly-based gains.

With little economic news this week markets have been chopping around in directionless trading. Overnight, we’ve seen broadly based falls in equities in Europe and the US, unwinding the previous day’s move. After the circa 5% gain yesterday, oil is off a couple of percent which hasn’t helped sentiment.

The main theme this week has been the relentless strength of the Yen and that has continued over the last 24 hours, indeed accelerated. Even though USD sentiment has perked up on other crosses, USD/JPY is still down 1.4% to 108.20 after falling as low as 107.67, the lowest in almost 18 months.

Japanese officials have been out in force trying to jawbone the Yen weaker. It has almost been a daily ritual of Chief Cabinet Secretary Suga to talk of “watching fx markets with vigilance” and “excessive fx moves cause negative impact on economy”.

Those cries for a reversal have gone unheeded, with the market discounting the possibility of any intervention at current levels, where the Yen remains very cheap taking a longer term perspective. Furthermore, it hasn’t just been speculators buying Yen, exporters have been repatriating funds and no doubt the stronger Yen trend has encouraged a rise in target hedge ratios for exporters and Japanese investment funds, which is helping fuel the currency strength. 

NZD/JPY closed last week at 77.12 and this morning is at 73.30 – a more than 3-year low – representing a circa 5% fall. Yesterday we mentioned a long-term PPP fair value for USD/JPY of 93. 

On the NZD/JPY cross the fair value level is just over 63. Like a stopped clock only tells the correct time 0.1% of the time, the PPP level is rarely achieved. The last time the cross was at long-term fair value was September 2008 as Lehmans was going under. Apart from the depths of the GFC, NZD/JPY has traded above our PPP estimate for the best part of the last 14 years.

NZD/USD is down 0.7% to 0.6775, close to the middle of its trading range for the past 30 days. The AUD is the weakest of the majors, down 1.2%, close to the 0.75 mark.

The broadly based USD strength (excluding against the Yen), sees the EUR and GBP down modestly. ECB Board members Draghi, Praet and Constancio all spoke overnight and the ECB released minutes of its March meeting.

The consistent theme was that they’d take whatever measures are required to boost growth and inflation. While direct financing of governments was ruled out, Draghi noted that he still had plenty of tools at his disposal. The minutes suggested that a larger rate cut and other policy measures had been considered at the last meeting.

Finally, China’s foreign reserves showed their first increase since October, suggesting much slower capital outflows, helped by the tightened capital controls and a weaker USD trend. These factors have helped reduce pressure on the Yuan to depreciate. 

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