2026 has started at quite a pace in economics and financial markets. A further push to events took place late of Friday evening UK time as something we had been expecting took place.
NEW YORK/LONDON — The yen rose sharply against the dollar in volatile trading Friday, hitting the 155 yen range as currency market players kept alert for signs of an intervention by the Japanese government and the Bank of Japan. (Nikkei Asia)
The situation had observers wondering What’s Going On? Marvin Gaye style as the Japanese Yen did this.
After the news conference, Japan’s currency weakened to the low-159 range around 2:30 a.m. Eastern time, before surging to the low-157 range within the next 10 minutes.
The reality as regular readers will be aware was that we had moved into the potential intervention zone and the clock was ticking. In fact someone at the Ministry of Finance was probably sweating on it.
A finance source in London said that the U.S. Federal Reservewas conducting a rate check, often seen as a precursor to a foreign exchange intervention, at the direction of the U.S. Treasury Department.
The reason I say that is because the job of checking exchange-rates was conducted by the Federal Reserve because it was already Saturday morning in Japan. In terms of what then happened I disagree with Nikkei Asia.
Traders appear to have bought yen in reaction to signs the U.S. and Japan were working together to head off further weakness in the Japanese currency.
What I mean by that is we would have seen US Dollar buyers disappear and traders marking the Yen higher with very little trading happening. A sort of test for the Bank of Japan because if it was going to intervene they will have wanted to make it pay for it with a much higher Japanese Yen.
Also the instructions may have come right from the top.
Markets are on high alert after Japan’s Prime Minister Sanae Takaichi warned of action against “abnormal” yen moves, fueling speculation of imminent currency intervention. ( @DeltaOne)
In fact it has surged again this morning gaining another couple of big figures and is presently 153.50 versus the US Dollar. Also let me be clear that as far as we can tell this is all on open mouth operations as not one Yen or Dollar has been spent.
Another Plaza Accord?
There has been a lot of speculation that we may see some sort of repetition of the 1985 Plaza Accord so a Plaza Accord 2.0, so let me break it down. Firstly I think that some of the talk is based on a misunderstanding of what the Federal Reserve did on Friday. It was merely an agent acting on behalf of the Bank of Japan not the US Treasury. This has happened before more than a few times.
Some support for such thoughts comes from the reality that President Trump has traditionally favoured a weaker US Dollar. This was true of his first term and the “Too Late” barrage of criticisms aimed at Fed Chair Jerome Powell aim at a world of lower US interest-rates and thus presumably also a weaker Dollar. This would help manufacturing which is another Trump aim.
If we look wider the Japanese Yen has also weakened cross the board. So the Euro area and the Chinese would also likely be on board with more Ten strength. The Euro had moved to 186 Yen and it was not so longer ago that it moving above 160 seemed significant.
The issue is whether the US and other countries will actively support this in a Plaza Accord 2.0 style or simply be passive? For example from the perspective of the US the Dollar is weaker against other currencies as for example the UK Pound £ has rallied above US $1.36 so it is getting what it wants without actually doing anything. For the moment they may as well wait and see and let the Japanese intervene.
Japanese Government Bonds
Foreign investors here have just had a good beginning to the week via the value of the Japanese Yen. I point this out as in my experience that is what investing in another bond market is about and for that reason you are likely to buy shorter dated bonds. With the way that longer-dated JGBs have traded that is probably for the best! But in a more serious point you do now get some yield in JGBs and with the Japanese government plainly looking to intervene the balance of odds has changed. The problem if you look at past currency intervention is that you will need to get out quickly as it has been a failure over time.
This is likely to be why the surges in Japanese bond yields we had been observing stopped as for example the ten-year yield is now 2.24%. That is a considerable improvement on the 2.37% peak seen earlier in the week. So did they indulge in open mouth currency operations for the Yen or JGBs or both?
Of course in a strategic sense a 2.24% bond yield would have seemed awful only a month ago.
The Carry Trade
The situation here has had quite a shakedown. Holders have gone from seeing the Yen drop which keeps adding to their profits to quite a sharp reversal putting plenty of red ink on their portfolio updates. As well as the price issue there is the quantity and volume one. Should the Bank of Japan intervene heavily then they could exhaust what US Dollar buyers there are meaning that should some try to exit the Carry Trade they could be selling into a relative vacuum.
This is different to the rise in official Japanese interest-rates because as I have pointed out many times it has been relatively minor with them still only being 0.75%. Whereas those who have been in the game for some time might find their minds turning to January 3rd 2019 when we looked at this.
The Japanese yen soared in early Asian trading on Thursday as the break of key technical levels triggered massive stop-loss sales of the U.S. and Australian dollars in very thin markets. The dollar collapsed to as low as 105.25 yen on Reuters dealing JPY=D3, a drop of 3.2 percent from the opening 108.76 and the lowest reading since March 2018. It was last trading around 107.50 yen.
Comment
We have now entered a situation which is very unstable which in an irony is exactly the opposite aim of the Japanese authorities. To keep the Yen at these levels then they are going to have to sing along with Nils Lofgren.
‘Cause I found out love just ain’t enough
I need devotion to back it up (Back it up baby)
I found out, love just ain’t enough (Back it up now)
I need devotion to back it up (Back it up baby)
Or markets will spot the weakness and drive the Japanese Yen even lower through 160 versus the US Dollar. So whilst today they may think this is a success the reality was sung about by Elvis.
We’re caught in a trapI can’t walk outBecause I love you too much, baby.