Yen intervention will not change fundamentals

 

The coordinated Yen intervention continues as we see the currency has continued to improve. Short-term intervention can reduce volatility, but this is not a volatility problem. This is a policy problem, and nothing has changed in policy. The Bank of Japan has moved its target rate to 1% and has provided forward guidance that it expects rates will continue to move higher. If this is the policy, then the yen carry trade will be reversed, and there will be further upward pressure on US Treasury rates.

The expectation is that short-term intervention will stop the yen slide and reduce pressure on global rates, but that is not how markets work in the longer run. There is no change in BOJ policy, no change in Fed policy, and no change in global imbalances. Hence, the markets will readjust their positions and currency rates will have to adjust. The process can be slowed but not reversed.