MUFG Puts Faith in Fundamentals Over Yen Intervention

Mitsubishi UFJ Financial Group (MUFG) has taken out a long position on the Australian dollar against the Japanese yen, betting that joint intervention efforts will ultimately prove ineffective in driving up the value of the yen. The bank's new trade idea targets a price of 114.50 for the AUD/JPY pair, with a stop loss set at 109.20.

The move comes as MUFG argues that fundamentals, not intervention itself, have historically driven changes in the direction of the USD/JPY pair. The bank points to three prior instances where joint or coordinated intervention efforts were made: in 1995, 1998, and 2011. In each case, the initial post-intervention price levels for the pair were breached before a lasting change in direction took hold.

In 1995, rate cuts in Japan and Germany combined with a pick-up in US growth pushed the USD/JPY pair higher. The sharp decline in 1998 was triggered by a rapid reduction in the Fed funds rate between September and November. In 2011, record unilateral Japanese intervention and the arrival of Shinzo Abe as prime minister drove the pair higher.

Applying this framework to the current environment, MUFG argues that US fundamentals are now turning, which can support a lower USD/JPY over time. However, any such move is expected to be smaller and less abrupt than the 1998 episode.