JPY intervention starts as we expected

- "MOF intervened unilaterally in the forex market today by selling JPY, likely triggered by the governments motivation to defend the 80 line. The decision was also likely motivated by the excessive nature of JPY appreciation in light of US stock market and interest rate trends, and by domestic political conditions following the DPJ leadership election. Although the intervention was unilateral, we think it was probably unsterilized (i.e., that the BOJ is unlikely to try to mop up the liquidity created). Judging by reports that MOF sold some ¥1.5tn of JPY today, we estimate that by the time their intervention is finished it could have sold ¥10–20tn."
- "Based on the impact of previous intervention and the current level of US interest rates, we estimate that USD/JPY could rebound to 85–87 in the near term. However, forex market trends are largely determined by USD weakness against all major currencies, which reflects the poor fundamentals of the US economy. Judging from past interventions, such JPY selling can only prop up the USD for one to two months, thereafter developments will once again depend on US fundamentals. We are therefore maintaining our forecast for USD/JPY at 82.5 by year-end 2010 and 80.0 by end-March 2011."

Nomura FX Insights 2 20100915

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