A hawkish Federal Reserve on Wednesday will bode ill for the battered yen and raises the probability of an imminent round of FX intervention from Japan. Nonetheless, economists at ING believe that the USD/JPY pair has room to run above the 135 level.
FX intervention appears to be the only solution
“With no signs that the BoJ is deviating from its ultra-loose policy but with a growing desire to stabilise the yen, FX intervention really does appear to be the only solution, unless Japanese authorities are betting on market dynamics (i.e. a correction in US yields) to drive USD/JPY back lower. The prospect of a hawkish Fed on Wednesday does not bode well for such a bet.”
“Should Japan go ahead with FX intervention, expect it to be deployed around the European or US open when markets are more liquid.”
“We believe markets are starting to price in intervention and that might limit USD/JPY for now, although few tangible indications that such a tool is about to be deployed may trigger USD/JPY appreciation well beyond the 135.00 mark.”