The second half of September brought extreme volatility in the currency market. One of the causes was the Bank of Japan (BOJ) intervening to support the yen.
It was the first intervention in more than two decades. However, while the immediate impact was noticeable, there was little or no follow-through.
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In fact, the USD/JPY pair, as this was the pair the intervention took place on, is back to where it was before the central bank began buying yens for dollars. So what does this tell traders?
Here are a couple of things to consider. First, interventions are limited in scope. At best, they can slow down the pace of currency depreciation.
Second, the BOJ does not have much ammunition to stop the yen’s depreciation. Japan holds $1.3 trillion in reserves, but only about $135.5 billion is held as deposits. The rest is parked in US Treasury bills.
Therefore, the BOJ would first use liquid deposits and securities that can easily be converted to cash.
$19.7 billion was used for the BOJ intervention
Towards the end of last month, the market participants found out the size of the BOJ’s intervention. As it turns out, the central bank used $19.7 billion to support the yen or 2.8 trillion yen.
Two things are worth mentioning here.
First, the amount is slightly equal to the amount used in the 1998 intervention – 2.8 trillion yen in 2022 vs. 2.62 trillion yen in 1998.
Second, suppose we divide the reserves held as deposits with other central banks and the Bank for International Settlement ($135.5 billion) by the amount used to intervene in the markets ($19.7 billion). In that case, the result indicates that the BOJ has the ammunition to intervene six more times at the same scale.
That is, assuming that it is willing to ditch all its deposits.
What next?
The next logical thing to do if it were to be taken seriously is to sell US Treasury bills. Remember that the BOJ intervened by selling US dollars and buying yens. But to sell US dollars, it must convert some assets into dollars – such as US Treasury bills.
What do the charts say?
The intervention announcement was a shock for currency traders. As a result, the yen gained about 5% on the day against the dollar.
But that was pretty much it. The market recovered in the days that followed, and now it is pressuring against resistance.
However, knowing the BOJ is on the lookout at current levels, the USD/JPY should have a hard time advancing. As such, on any move lower, expect buyers to emerge around 140.
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