JPY: USD/JPY closing in on intervention
The strong dollar environment keeps USD/JPY grinding higher and approaching the 145 area, where Japanese authorities sold FX last September. True to firm, top finance officials in Tokyo are working through their handbook of verbal intervention and look only a few steps away from being ready to pull the trigger.
Last autumn's Japanese FX intervention was well timed in that it shortly preceded a turn lower in US inflation and a reversal in the strong dollar. The risk of intervention now, however, is that US inflation stays sticky and that Tokyo is drawn out into a long battle against USD/JPY in the 145/150 area. We do think USD/JPY goes lower later this year on a turn in the dollar, but over the coming month, we can see USD/JPY sharply bouncing around in a 140-145 range – suggesting that short-dated USD/JPY option volatility is priced a little too low.
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