The FX week starts with traders bracing for another day of 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 is holding up quite well. Whether that continues to be the case will be a function of this week’s US jobs data
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 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, 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 job openings, , and Friday’s report. On NFP, consensus is around +75-80k and probably not quite weak enough to rule out a . 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 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?
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 – 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.
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