FX Daily: Joint Yen Intervention Is A Containment Exercise

The FX week starts with traders bracing for another day of USD/JPY intervention from Japanese and US authorities. Despite a lot of dollars having been supplied to the market over the last three days – perhaps $70-80bn – the broader dollar is holding up quite well. Whether that continues to be the case will be a function of this week's US jobs data.

Joint US-Japan intervention is rare, but we doubt it drives USD/JPY sustainably under 155.

USD: Market still buying into a Fed hike

In theory, the dollar should be broadly weaker today after the US and Japanese authorities confirmed joint FX intervention (more below) and the Japanese probably sold $70-80bn over the last three days. Lower oil prices should also be weighing on the dollar on reports from US President Donald Trump that negotiation, rather than military firepower, is Washington's preferred method of engaging with Iran.

The fact that the dollar is not broadly weaker probably owes to the unresolved issue of whether the Federal Reserve will hike in September. Having briefly priced less than 10bp of tightening after Chair Kevin Warsh's press conference last week, that pricing has now bounced back to 16-17bp on the view that a failure to hike would lead to a further sell-off in the long end. Here, US 30-year Treasury yields remain over 5.20% and the 30-year mortgage rate has risen to 6.75%.

It seems the only way the Fed can avoid hiking in September is if the US data is poor enough. A major input to that decision comes this week in the form of US jobs data, including JOLTS job openings, ADP, and Friday's non-farm payrolls report. On NFP, consensus is around +75-80k and probably not quite weak enough to rule out a Fed hike. In other words, the case for a sustained sell-off in the dollar has yet to be made.

For today, the focus should be on a reasonably strong July ISM manufacturing release.

The DXY dollar index will be bounced around by the USD/JPY intervention story, but with decreasing marginal impact from this news story, we suspect DXY could find support near 99.35/40 and can break back above 100 this week.

EUR: What to make of EUR/JPY intervention?

EUR/USD should probably be doing better, buoyed by decent eurozone hard data last week, lower oil prices and lots of dollar selling from Japan. The fact that it is not may partially be owed to the news that US authorities were checking rates in – and possibly selling – EUR/JPY on Friday. However, we doubt such news will have any lasting impact on the euro. For reference, the US Treasury only has around $13bn of euro-denominated FX reserves to sell ($1.2bn in deposits, $11.7bn in securities), which is barely a drop in the ocean compared to Tokyo's activity in FX markets and the size of global FX flows.

We suspect the US Treasury might have sold EUR/JPY – in effect raising yen investments at the Exchange Stabilisation Fund at the expense of the euro – to avoid having to explain to the US public why it was selling the dollar.

The bigger and more lasting driver of the EUR/USD trend will be the Fed's September decision. That remains unresolved, and US data this week will have a big say if we end the week pressing 1.1615/20 resistance or trading back below 1.15.

JPY: Intervention as a containment exercise

The big story here is participation from Washington in bilateral intervention with Tokyo. The Fed had checked rates – a precursor to intervention – back in January, but seems to have pulled the trigger on Friday. Why now? Perhaps US Treasury Secretary Scott Bessent had felt that the weak yen was undermining JGBs, which, in turn, was weighing on Treasuries. Notably, Japan has intimated it will be using the Fed's new FIMA repo facility. This allows it to raise dollars against Treasury holdings rather than having to outright sell Treasuries to undertake intervention.

There is a lot to say on this subject, but what does it mean for USD/JPY prospects? This intervention does not change the fundamentals of a Fed close to hiking and Tokyo running a loose set of monetary and fiscal policies, which are weighing on the yen. We struggle to see this bilateral action driving USD/JPY sustainably below 155. But equally, it does serve as a containment exercise, limiting investors from chasing USD/JPY through 160 and buying time for Tokyo to introduce more yen-positive policies. These could include more incentives to invest in Japanese domestic assets.

CEE: Better mood helps regional currencies but koruna may lag

The new month starts with a fresh data calendar, led by Turkey today. We expect July CPI inflation at 1.7% month-on-month, bringing the annual rate down to 31.7% from 32.1% in the previous month. On a seasonally adjusted basis, which the central bank monitors closely, we expect July inflation to move back above 2%, closer to the average seen over the past two years.

On Wednesday, the Czech Republic will release July inflation, which we expect to rise from 1.5% to 1.7% year-on-year, driven by higher fuel prices after the end of the reduced diesel excise tax and margin cap at fuel stations. The Czech National Bank meeting follows on Thursday, where rates are likely to stay unchanged at 3.75%; the focus should be on the new forecast and forward guidance, which we expect to be dovish relative to market pricing.

Hungary will publish July inflation on Friday, and we expect a further decline from 1.7% to 1.2%, below both market expectations and those of the National Bank of Hungary.

As in recent weeks, Middle East headlines are setting the tone at the start of the week. The lack of further escalation points to a more constructive mood in the days ahead, while new highs in EUR/USD should support some gains in CEE currencies. EUR/HUF touched local highs near 365 on Friday, driven by global risk-off and news from Hungary about the temporary closure of a nuclear power plant, which could affect both industrial production and energy imports. Given its current sensitivity to global risk sentiment, the forint could benefit the most in the region, followed by the Polish zloty. By contrast, EUR/CZK remains largely driven by the interest-rate differential, and this week’s CNB meeting should deliver a dovish tone, pushing EUR/CZK above 24.250.