FX markets are subdued with little evidence to suggest traders are prepared for the big moves likely to follow the FX intervention by Japan's auth
FX markets are subdued with little evidence to suggest traders are prepared for the big moves likely to follow the FX intervention by Japan’s authorities they are expecting.
When Japan last intervened in 2022 it spurred huge moves, with USD/JPY dropping from 152 toward 127. EUR/USD rocketed from 0.9528 to 1.1034, while GBP/USD, which had fallen toward parity, surged toward 1.25, and $400/oz was added to the price of gold.
In the past year traders have seen very little action, with EUR/USD – the main traded currency pair – largely contained within 1.05-1.10, and 2023’s range one of the smallest on record.
As a consequence of the lack of movement – and the encouragement to take more risk that’s stemmed from surging equities – cash has headed into carry trades.
These more risky trades designed to profit from interest rates differentials are acutely vulnerable to big FX movement.
Should the BOJ intervene, currency markets will be jolted form their slumber with current profits in yen-funded carry trades potentially becoming losses, and the scramble to hedge FX risks spurring a rise in currently low option vols as traders seek ways to mitigate likely losses.
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