Taking action on the foreign exchange market for the second time before the holiday? The market even speculates that "Japan not only raised the yen, but also lowered oil prices."

Just before the "Golden Week" holiday in Japan (May 3-6), suspected intervention in the foreign exchange market occurred twice within less than 48 hours. What caught the market's attention was the sudden drop in Brent crude oil prices during the same period that the Japanese yen soared. Many institutions speculated that Japan's actions this time may extend beyond the currency market to the crude oil futures market. On Thursday (April 30), shortly after the market opened, the Japanese yen suddenly soared. Based on trading data, Goldman Sachs estimated that there could have been over $30 billion in official buy orders that day, causing the US dollar to yen exchange rate to drop sharply from above 160 to 155.57, marking the largest single-day volatility since December 2022. With the Japanese market closed on Friday due to the holiday, the yen retraced its gains during trading hours and then rose again, ultimately stabilizing around 156.80. The shockwaves from the intervention spread rapidly: the US dollar came under pressure, Brent crude oil fell sharply, the yield on 10-year US Treasury bonds declined, and US stocks hit all-time highs, with the S&P 500 recording its largest monthly gain since November 2020. As the yen soared and oil prices plummeted in the same window of time, the market began to question: was Japan also manipulating oil prices? Atsushi Mimura, Vice Minister for International Affairs at the Japanese Ministry of Finance, hinted after the intervention that further actions may be taken during the Golden Week holiday. He also unusually extended the warning to the energy sector, stating that they were "prepared to take action in crude oil futures trading at any time." The market interpreted this as an indirect confirmation of the speculation about "intervention in oil prices." During the same time window, oil prices plummeted: coincidence or coordination? In the early European session on Thursday, Brent crude oil briefly surged to multi-year highs due to escalating tensions in the Middle East. Just minutes before Japan's intervention, oil prices plummeted sharply under heavy selling pressure. Rabobank suggested that this "may be the result of Japan selling oil while intervening in the currency market" and asked, "Have we reached a point where the Ministry of Finance is actively managing the oil market?" Brent Donnelly, President of Spectra Markets, provided another explanation from a position perspective: "If you are long on oil prices, you are probably shorting the yen at the same time. When the yen positions are blown up, you would sell oil futures to stop the losses." In other words, being short on the yen and being long on oil prices are highly correlated positions in the market. The rapid rebound of the yen triggered a chain reaction of closing these positions. Regardless of which explanation is accepted, the intense linkage between oil prices and the yen within the same time window cannot be seen as a coincidence. Officials' warnings extend to the oil market: the "double signal" behind the exchange rate intervention After the intervention, Mimura issued a dual warning during a press conference. Regarding the exchange rate, he stated, "I will not comment on future actions, but I want to point out that the Golden Week holiday has just begun." As for oil, he explicitly stated, "In general, we are prepared to take action in crude oil futures trading at any time." This statement was seen by the market as an indirect confirmation of the speculation that Japan was intervening in oil prices simultaneously. According to Bloomberg, US officials were informed before the intervention, which added credibility to the aforementioned speculation as both Japan and the US are major importers of Gulf energy, they have strong motives to lower oil prices. Mimura also revealed that Japan and the US maintain "extremely close contact" and share a consensus on the situation and actions. Scale and timing of intervention: carefully chosen "Golden Week window" According to Bloomberg's analysis of Bank of Japan account data, the scale of the intervention on Thursday was approximately 5.4 trillion yen (about $345 billion), comparable to the 5.5 trillion yen in July 2024, making it one of the largest single interventions to date. Estimates from Goldman Sachs Trading indicate that official funds accounted for 60% to 65% of the unusually high trading volume exceeding $65 billion on the EBS platform that day, the highest proportion in past interventions. The choice of intervention timing is also intriguing. Japanese Finance Minister Okotake Kozue told reporters before the holiday, "Whether you are out or resting, please carry your smartphones at all times." This unusual signal was interpreted by the market as a signal of imminent intervention. Jordan Rochester, Fixed Income and Currency Strategist at Mizuho, pointed out that traders were not willing to "defy the potential for a second round of intervention," especially in the low liquidity window of the Golden Week combined with the UK's Monday bank holiday, amplifying the market impact of the authorities' intervention. Can intervention continue to be effective? The market generally doubts the long-term effectiveness of intervention. Rabobank pointed out that Japan faces structural pressures: as a major energy importer, high oil prices continue to impact its economy, and the Bank of Japan is only cautiously moving towards normalization after years of ultra-loose policies. Authorities can resist market forces temporarily, but they cannot fundamentally change them. Bloomberg quotes traders as stating that without further action, the bullish trend driven by the yen intervention faces the risk of dissipating. Kathleen Brooks, Director of Research at XTB, said, "There have been several instances of failed interventions in history, which means that the yen's rally may not be sustainable." Chris Turner, Global Head of Markets at ING, highlighted a key variable: "The real variable is whether the US Treasury will intervene." The Federal Reserve confirmed in February this year that its New York trading desk had inquired about the USD/JPY exchange rate on behalf of the US Treasury, briefly boosting the yen. Goldman Sachs believes that the market is setting several "red lines": oil at $120, 10-year US Treasury yield at 4.5%, 30-year yield at 5.0%, and USD/JPY at 160. The proximity to these critical levels adds fuel to any negotiating for the situation to ease. As the Golden Week holiday has just begun, the market remains highly vigilant about Japan's next steps. This article is excerpted from "Wall Street Insight," by Li Jia; edited by He Yucheng for GMTEight.