Intervention fears to proceed to assist preserve a lid on USD/JPY upside – Credit Agricole

The currency pair continues to do battle in and around the 162 level to start the new week. And according to Credit Agricole, this sort of push and pull is likely to persist for longer with Tokyo officials set to help keep things in check – for now at least. The firm notes that:

“The risk of intervention reduces the demand for being long USD/JPY as a carry trade. And the MOF has enough FX reserves to perform over 15 more FX interventions of the size it did during April and May. With USD/JPY clearing the important 162 level, however, the key battleground for the exchange rate in the 162-164 region has opened up.

In the end, Japan benefits from a weak JPY and so has to manage the political and economic realities around the currency. The weak JPY is boosting company profits, exports and importantly is helping lift domestic investment to the levels Takaichi wants to see during her tenure. So we think Japan’s authorities will continue to manage a weak JPY but avoid USD/JPY moving above 164 in the long term.”

In essence, Credit Agricole sees a bit of a limit in terms of where USD/JPY traders can push the upside narrative for the currency pair. But in all likelihood, it also speaks to the potential for the pair to bounce back despite potential intervention rounds that Japan may decide to embark on.

And that is also precisely what Goldman Sachs is arguing, that being USD/JPY continuing to trade higher even if Japan decides to intervene in the market again:

“We see no reason for the upward trend in USD/JPY to stop without an unexpected negative US growth shock or a BOJ pivot towards more aggressive policy tightening. Intervention can slow the move and buy time for a potential shift in the macro that then leads to sustained yen appreciation. But without that, the impact ultimately proves short-lived with diminishing effect, and we think that either a recession or more rapid BOJ hikes look unlikely over the coming year.

That implies that the trend higher in USD/JPY should extend, even if there are additional rounds of intervention that successfully reset the exchange rate to lower levels and suppress vol for some time.”

Goldman Sachs sees USD/JPY trading to 162, 163, and 165 in the coming 3, 6, 12 months respectively.