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Japan

USD/JPY drops from 131.00 to 130.35 after hitting 131.00 earlier in the day

Excess FX volatility is undesirable

Will take appropriate action if necessary Communicating closely with BOJ and currency authorities of other countries

Again, these are merely verbal interventions, but they come at a critical time when USD/JPY is attempting to break above the 130.00 handle.

The fact that the official is threatening intervention is enough to cause the yen to recoup some of its losses today, though USD/JPY is still up 1.5 percent even at around 130.35.

Forex

• The USD/JPY is up 2% to 131.00 as the yen continues to weaken.
• There will be no catching the falling knife that is the yen.
• The yen’s decline is unstoppable at the moment, as the BOJ’s policy meeting decision today did not help the currency. USD/JPY has briefly touched the 131.00 handle and is up 2% on the day.
• The BOJ’s decision to maintain fixed-rate operations will do little to help the yen, and the fact that Kuroda continues to ramble on about ultra-easy policy highlights the monetary policy divergence between Japan and the rest of the developed markets, with the exception of Switzerland.
•  As we approach 131.00, expect more verbal intervention from Japanese authorities in the coming days/weeks. The next key level to watch will be the 2002 highs near 135.00, but even that may just be a speed bump on the way up.

Equities

• S&P 500 futures are currently up 1.7 percent in European morning trade.
• Equities appear to be making a late-month stand, with a strong rebound beginning to take shape after a bit more of a back-and-forth session on Wall Street yesterday. The positive mood has been aided by Meta’s earnings beat, but the gains aren’t limited to technology. A look at European stock exchanges:
• Stoxx 600 +1.3 percent; Germany DAX +1.9 percent; France CAC 40 +1.9 percent; United Kingdom FTSE +0.9 percent; and Spain IBEX +0.5 percent.
• Meanwhile, futures for the S&P 500 are up 1.7 percent, Nasdaq futures are up 2.3 percent, and Dow futures are up 1.1 percent.
• It’s all looking good now, but keep in mind that sentiment can shift quickly, as yesterday’s strong early gains were followed by a bout of heavy selling.

Dollar

• Recently, dollar funding appears to be in short supply.
• Is a lack of dollars a contributing factor to the greenback’s rise?
• This is something to consider when examining the behaviour of cross-currency basis swaps. The EUR/USD 3-month cross currency basis has widened to its widest in nearly eight weeks, while the yen-dollar 3-month basis has also widened to its widest in nearly two months.
• Setting aside the pandemic blip, the conditions outlined above show that the market for dollar funding is currently quite tight. That could be a sign of financial stress or a lack of funds.
• The fact that we also have the Fed coming up next week (which is expected to be more aggressive) against the backdrop of the BOJ this week (which is expected to reaffirm ultra-easy policy) doesn’t help the above conundrum.