USDJPY: Near-term scope towards 104 levels - BBH

Research Team at BBH, notes that the dollar fell to JPY99.00 on Friday in the frantic activity as it became clear that the UK was choosing to dissolve its more than 40-year old marriage to the EU. 

Key Quotes

“Although some suspected a sharp bounce to JPY102 may have been intervention, we doubt it.  There has been no dealer confirmation, and similar price action in volatile and thin markets was seen in other currency pairs in the same time window.  

At a little below JPY101, the dollar retraced 50% of the Abe-induced rally.  The 61.8% retracement is found near JPY95.   Like the euro, the dollar managed to finish the week just inside the lower Bollinger Band (~JPY102.10).  Its recovery met resistance near JPY103.  Just like we think the euro has little more upside potential in the snap back after the dramatic move, so too does the greenback against the yen.  There is near-term scope toward JPY104.  

Some market participants have been warning of the risk of BOJ intervention since February. We have been skeptical.  However, in light of the recent developments and the G7 statement that reiterated the undesirability of volatility and disorderly markets, we suspect the risk of intervention has increased. The first line of defense will likely be the swap line network developed during the recent financial crisis.  

The other point that needs to be made believing that the BOJ picks some level like JPY115, of JPY110, or JPY100 that it will then defend is not particularly helpful, in the sense that it does not lead to robust strategies.  It is to misunderstand the concern of officials.  It is not the level that is ultimately the key but the pace of change, or volatility.”