Intervention in the currency markets, unless it is coordinated with other central banks and/or is accompanied by other policy moves, such as a change in interest rates and/or is on a massive scale, can have a limited impact.
This has so far been the case with intervention by the Ministry of Finance (sets exchange rate policy) and the Bank of Japan (carries out the forex policy) as USDJPY has climbed from an intervention low at 151,85 to a high so far today at 156.77. Technically, it is still below the 61.8% retracement at 156.98 and the key 157.98 level.. So, the jury is still out on whether the MoF/BoJ has put a cap on USDJPY above the 160 level.
How Intervention Impacts Trading
How intervention (or the threat of) impacts trading liquidity and how, in turn, how this impacts trading.is the focus of this article.
In the current case, while the interventions have so far not been enough to push USDJPY below 150 let alone keep it under 155, they have likely sent those who got caught in the initial waves of selling to the sidelines. In addition, those who are wary of getting caught in another surprise intervention are either playing it close to the vest or looking at other currencies to trade. As a result, the market is less long USDJPY than it was pre-intervention and less able to absorb fresh demand for the currency, as in the following::
In a sign that recent government intervention to support the yen may be shifting, market psychology, the latest Commodity Futures Trading Commission data showed that hedge funds and speculators slashed their short yen positions by 20% in the week to May 7 – the biggest weekly yen-bullish swing since 2020 (Reuters).
This may be why USDJPY is having difficulty absorbing buying as well as the JPY selling side of a cross-flow, which I call following the Path of Least Resistance. One look at this EURJPY chart shows why USDJPY has rebounded and where demand may be coming from.
So, it is important to separate the initial reaction to intervention to what comes after. In the case of USDJPY, the supply-demand imbalance is no longer one-sided and in fact, a case can be made that it may even have tilted the other way. This along with what was indicated above, has made it more difficult to absorb yen selling (i.e. USDPY buying) The key takeaway is that intervention can temporarily shift the supply-demand equation but then can backfire if reduces liquidity on the other side of the market.
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