MUFG’s Derek Halpenny notes that recent Ministry of Finance (MoF) and Bank of Japan (BoJ) intervention failed to prevent USD/JPY from returning to 160, as higher US yields and renewed Middle East tensions support the Dollar. He highlights rising crude Oil risks, stronger speculation for a June BoJ rate hike, and stresses that BoJ action should cap further USD/JPY gains, with upside seen as limited.

BoJ tightening expected to cap yen losses

“The largest single month of intervention by the MoF/BoJ (JPY 11.7trn) has had a brief impact on the yen highlighted by the fact that USD/JPY traded the 160-level today for the first time since intervention took place, probably on 30th April & 6th May. The success of intervention is always determined by whether the fundamental backdrop can reinforce the intervention – and that hasn’t happened.”

“Although the price of crude oil has fallen since intervention took place, it is on the rise again and the continued reports of escalation in military conflict is placing some serious doubts over the prospects of a near-term reopening of the Strait of Hormuz. We could be close to a tipping point that sees some renewed sharp increases in crude oil prices.”

“The BoJ at least, now looks to be trying to play its part in providing yen support. The OIS pricing for a rate hike on 16th June has increased by about 5-6bps since intervention took place with the probability of a hike now over 80% and the highest since mid-April.”

“We expect the BoJ to hike although US yields will remain important and USD/JPY could still gain although BoJ action will help contain any move. We still see upside USD/JPY scope as limited to a few big figures.”

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