Jawboning Japanese Style

A subtle hint at an undervalued yen set off a violent drop in USD/JPY to start the week. We look at Japan's history of jawboning and why the calendar might be the catalyst. Australian business confidence and a ruling on Japan's nuclear industry could be drivers later. EURAUD, USDCAD, NZDUSD and EURGBP trades are in progress.

The pound was the top performer to begin the week on polls showing the Conservatives gaining momentum while the Australian dollar lagged on worries about Chinese trade and iron ore woes. But the big move in New York trading was a sharp drop in USD/JPY to 119.70 from 120.40.

The drop came after Abe adviser Koichi Hamada said USD/JPY at 105 is appropriate given purchasing power parity. The pair later rebounded to wipe out the losses but then sagged back near 120.00.

It was a strange comment but shouldn't come as a major surprise. Hamada hasn't been a strong advocate for yen weakness and USDJPY purchasing parity is actually closer to 89 but for a trader, that's an almost meaningless metric. Currencies routinely deviate from PPP for years and even decades.

What isn't a surprise is the timing of the comments as the arrive just days ahead of the IMF and World Bank Spring meetings, which begin April 17. The previous meeting was in October and also included a USD/JPY dip after which came in the BoJ's latest QE increase.

Japanese officials are sensitive to claims about manipulation and a seemingly-innocuous comment from Hamada could give them some cover in case of criticism. For traders, it's also a demonstration about how timing USD/JPY longs have grown.

Looking ahead, a focus will remain on the sagging Australian dollar with NAB business confidence for March due at 0130 GMT. The prior reading was 0 and it's not generally a market mover but AUD is in a delicate place.

Another spot to watch for volatility is in USDJPY at 0500 GMT. That's when Japanese judges are set to decide on restarting two nuclear reactors. Speculation leans toward an injunction but if the courts clear the way for a restart it would signal a much-improved trade balance.