By Russell Glaser
Tough talk from Japanese officials continues to spark speculation of additional intervention in the FX markets to weaken the yen. Market positioning is also overextended and a move higher in the USD/JPY could be sharp and quick.
Comments Thursday from Japanese Finance Minister Yoshihiko Noda hint at potential intervention by the Ministry of Finance. Noda says he is keeping an extremely close watch on moves in the forex trading markets and will work with other nations to preserve market stability. Prime Minister Naoto Kan said the government will do what is necessary to address the one-way moves in the value of the JPY.
Earlier Thursday the USD/JPY slumped to its lowest level since August 1, as weak US fundamentals and heightened risk aversion bring about an increase in safe haven inflows to the yen to weigh on the pair. The EUR/JPY has also moved to its lowest level since the March intervention. CFTC International Monetary Market data shows speculators currently hold the largest long yen position since August 2010. While the CFCT data was taken prior to last Thursday’s round of intervention, given the declines in global equity values this week it is a fair assumption that the JPY has received increased safe haven inflows. The sharp one-way price action and market positioning could be enough reason to bring on another bout of FX intervention by the MoF to weaken the yen and cause some pain to the hedge funds and other FX speculators who have driven the value of the yen higher.