A commentary by Naomi Fink, Global Strategist at Nikko Asset Management, as it related to yesterdays Fed decision.
“Markets have had their hands full attempting to anticipate central bank policy decisions and guidance. Although forex markets interpreted the BOJ’s widely anticipated decision to remain on hold as an initial signal to further extend already over-extended yen selling, this strategy appears to have been unsuccessful in holiday-thinned trading. Add to this Fed Chair Powell’s statement, which was interpreted as more dovish than expected, which caused yen short positioning to crumble further. Inflation, however; remains higher than desired in the US, and the Fed remains in wait-and-see mode not; however, ruling out cuts altogether. Our outlook remains, should disinflation continue going into H2, that there may still be room for one cut in 2024. Recall the Fed was signaling three rate cuts in 2024 at the start of the quarter.
“With regard to intervention in dollar-yen, it is certainly within the realm of the possible for the MoF to intervene to sell foreign reserves if it believes that forex moves risk becoming disorderly. However, noting that yen-buying intervention is different from yen-selling intervention - Japan can only print yen, but cannot print foreign currency - so the ability to engage in the former is more limited than the latter, even despite the presence of plentiful FX reserves. So, this compels MoF to be more strategic about yen-buying/forex selling than yen-selling. In this context, moves that appear speculative in holiday-thinned trading might be seen as conditions that merit intervention.”
