Foreign Currency

Market Hunts for Signs of Yen Intervention in Fed Accounts


(Bloomberg) — Fresh data on the Federal Reserve’s various accounts hints at two potential ways Japanese policy makers may have funded currency interventions this past week to bolster the yen.

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One source may have been a Fed facility where central banks stash overnight cash to earn a market rate. The amount held in this pool — the Fed’s foreign reverse repurchase agreement facility — as of May 1 was down about $8 billion from a week earlier, to $360 billion, figures from the central bank show. It was the first drop since the week through April 10. Meanwhile, a separate cash account used by central banks tumbled about $17.8 billion.

“Historically, the Japanese authorities have not stockpiled their intervention resources in the Fed’s non-interesting-bearing foreign official deposits category,” Wrightson ICAP economist Lou Crandall wrote in a note to clients. “The interest-bearing foreign RRP facility offers more than enough liquidity to support FX operations,” however, the week’s data “suggest that this was an exception” to their usual practice.

The figures cover a week that included two instances where Japanese policymakers likely entered foreign-exchange markets to support the yen, which is the weakest Group-of-10 currency this year versus a broadly strengthening dollar.

The Ministry of Finance has refrained from confirming interventions, but a Bloomberg analysis of Bank of Japan accounts suggest they took place. Policymakers likely spent some ¥9 trillion this week, the analysis shows, or nearly $60 billion at current exchange rates, to bolster the currency — an amount on par with interventions that took place in 2022.

“They hid the intervention well,” said Gennadiy Goldberg, head of US interest rates strategy at TD Securities. “They must have prepared for it in advance by not rolling something and keeping lots of money in cash.”

Yen Surges

On Monday, a holiday in Japan, the yen fell to a fresh 34-year low of 160.17 per dollar before sharply rebounding in thin trading. On Wednesday following the conclusion of the Fed’s two-day policy meeting, the yen abruptly rallied more than 3% in the waning hours of the US trading day.

Japan’s foreign currency reserves were worth about $1.15 trillion at the end of March, climbing by $4.6 billion from the previous month, according to the latest data from the country’s Ministry of Finance. About $155 billion was parked with the Bank for International Settlements and other foreign central banks, down slightly from $155.7 billion at the end of February.

Before Japan intervened to defend the yen in October 2022, central banks had been boosting the amount of cash they parked at the foreign RRP to what was then a record $333 billion. Balances then declined by the most in five months later that month.

However, Japanese officials didn’t tap that Fed facility in a previous round of currency intervention in 2022, and most of the cash has been untouched for a decade, Citigroup Inc. strategists wrote in a note last month. As a result, they expected some sales of front-end Treasury bills or coupons if an intervention occurred.

Yet Wrightson’s Crandall expects the second round of intervention that likely occurred Wednesday to appear in next week’s Fed data, though it probably won’t be seen in the foreign officials deposits again.

“The temporary blip in the foreign official deposits category has been wiped out, so our reserve projections suggest that impact will appear in next week’s Fed data in the form of another decline in the internal foreign RRP pool,” he wrote.

–With assistance from Carter Johnson.

(Adds comments from Wrightson ICAP beginning in third paragraph, chart.)

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