USD/JPY above 160: Credibility falls further, BofA says yen could hit 165
By Aboki Forex —
A sustained move in USD/JPY above 160 without official intervention could weaken confidence in Japan's commitment to supporting the yen and send the currency toward 165, according to BofA Securities. The pair was trading near 160 ahead of the July US consumer price index report, placing renewed attention on whether Japanese and US authorities would intervene to curb further yen weakness.
Break above 160 signals weak policy resolve
BofA said a break above 160 followed by inaction would be interpreted as evidence of limited policy resolve. Under that scenario, USD/JPY could approach 165 during August, with the Japanese government bond yield curve likely to bear-steepen as longer-term yields rise faster than shorter-term rates.
Credibility eroded after August 7
Confidence in the authorities increased after Japan and the US conducted coordinated intervention on July 31. That credibility has since eroded, the analysts said, after officials declined to conduct follow-up intervention when weaker-than-expected US employment data pushed USD/JPY lower on August 7. The pair later returned to the 159 area.
What could restore confidence
A stronger policy response could restore confidence. Intervention that drives USD/JPY materially lower after strong US inflation data would suggest officials waited for the event risk to pass before acting. Authorities could also intervene after a weaker CPI reading pushes the pair lower, reinforcing the move and signalling an intention to strengthen the yen beyond a temporary correction.
A more limited response would leave credibility diminished. If officials prevent USD/JPY from breaking 160 but fail to push it closer to 155, markets may conclude that they are comfortable with the pair trading inside a 155-to-160 range.
Repeated intervention to defend 160 could prove costly. The Bank of Japan may then face greater pressure to accelerate interest-rate increases, shifting the main burden of supporting the yen from currency intervention to monetary policy. BofA said forecasting the exact timing or trigger for intervention remains difficult, since authorities have little incentive to establish a predictable reaction function.