How Likely Is a EUR/JPY-based Intervention?

With credit rating agency S&P downgrading euro zone assets left and right, it’s only a matter of time before people start thinking of currency interventions to counteract the euro’s dive. We all know the Swiss National Bank (SNB) set a floor on EUR/CHF at 1.0200, but how about the Bank of Japan (BOJ)? Is an intervention in the works?

The BOJ is certainly no stranger to currency interventions as it has openly admitted to actively selling the yen. You see, the Japanese economy highly depends on its exports, so a cheap currency would help make their products globally competitive.

Since the Fed, ECB, BOJ, BOE, SNB, and BOC launched a coordinated intervention last November, USD/JPY has been trading sideways in a 150-range between 78.25 and 76.75. Recall that in the past, the BOJ based its intervention decisions mainly on USD/JPY levels.

EUR/JPY vs. USD/JPY

However, the yen’s recent price action against the euro has been raising concern. After swinging high in November 2011, EUR/JPY continued to forge new lows, and now it’s down by over 1,000 pips!

No wonder rumors are flying that the central bank is shifting its focus from USD/JPY to EUR/JPY! 1,000 pips is no laughing matter! And with the S&P downgrading EU assets like there’s no tomorrow, even the Ministry of Finance is getting worried!

Right now market players are drawing a line in the sand for EUR/JPY at 95.00, around 200 pips from the pair’s current price.

Naturally, there are also those that think that a EUR/JPY-based intervention is downright crazy! Why? Well, for one, they believe that propping up EUR/JPY won’t even have a big positive impact on Japan’s economy. Why would the BOJ throw money at something that won’t even help?

With the euro zone crisis in full swing, Japan’s exports to Europe have already been somewhat weak as of late. Keep in mind that Europe’s problems are mostly internal in nature. That being said, a higher EUR/JPY exchange rate might not even do much to improve Japan’s exports to Europe.

Besides, I don’t think European officials would appreciate a EUR/JPY-targeted intervention. After all, they took a negative stance in the BOJ’s last two unilateral interventions. This presents a major obstacle as it suggests that the BOJ may strain relations with Europe if it decides to step in to weaken the yen again.

For now, it seems like USD/JPY will remain the BOJ’s main yardstick for yen strength, with many believing that the central bank will chill on the sidelines at least until the pair breaks below 75.00. However, the fact that EUR/JPY is drawing more attention from the markets is something that we shouldn’t ignore.

The central bank probably won’t base its decision to intervene solely on EUR/JPY levels anytime soon, but if the pair continues falling at this rate, it could very well turn out to be the straw that breaks the BOJ’s back.


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