If you go back 30 years, you will find that releases like US trade data could move US dollar/yen a few yen just on the release.

In some senses, it is easy to say what’s going on. The wide interest rate differential between the US and Japan is pushing dollar/yen up, but it has risen to a level that seems to the market to represent the unmoveable force that is the Bank of Japan which has intervened around the 150 region before. While this may explain some of the mechanics around the stalling of the dollar/yen rally, the impasse reveals more important issues about how the currency market has developed over many years.

The first thing we would say is that the current impasse may also reflects the decline of short-term speculators in the FX market. We’ve shown before how data on FX market turnover reveals that the makeup of the market has changed considerably. Over the past thirty years, the proportion of FX turnover attributable to “reporting dealers” in the BIS survey has risen a respectable 6 ¼ times to USD3.5tr per day. But so-called “other financial institutions” such as asset managers, hedge funds, non market-making banks and more has soared by 37 ½ times and is now above reporting dealers at USD3.6tr per day.

This is important in the Standard Bank’s view because it means that the FX market has gone from a short-term orientated market where the focus of most financial players was speculation aimed at making profits from FX trades, to a market today that is increasingly dominated by longer-term investors who are more likely to use FX as a conduit to take positions in other assets, such as foreign stocks and bonds.

Put another way, there is simply less speculation in the FX market and that’s notwithstanding the fact that we’ve seen large growth in FX trading by individuals on FX platforms. In fact, it is interesting that the currency that is most dominated by this trading - the so-called Mrs Watanabe’s – is US dollar/yen and yet, as we’ve said, it is the one that’s stuck at the moment.

One other point we should make is that the role of non-financial firms in the FX market, such as importers and exporters, which was never large in the first place relative to financial institutions, has seen its position fall still further. In 1992 it was 16% of daily FX turnover but today is down to 5 ½%.

In the Standard Bank’s view, the decline in market-moving speculation to profit from short-term FX moves means that there’s less compulsion in the market to take on central banks when, as we’ve seen with the BoJ, a sort of barrier is set at 150 in US dollar/yen. Longer-term asset managers, hedge funds etc are not so interested in trying to ‘break’ the BoJ as they are more likely just to use the FX market for financing of positions in other assets, such as JGBs.

“Even if we look at the number of specific FX-related hedge funds we see that their number has dwindled significantly. We also think that this change in the FX market has nullified the impact of data releases on the market. If you go back 30 years, you will find that releases like US trade data could move US dollar/yen a few yen just on the release. That looks a world away now as the market barely budges. This happens in our view, because there’s a decline in the speculative element of the market that seeks FX profit when news is released”, said the Standard Bank.

Today, the only ‘news’ that really moves FX significantly is of the sort that causes significant asset price movements – like a pandemic – because these stir big flows in other assets like stocks and bonds. Furthermore, there is no sense that non-financial flows from exporters and importers, for instance, can break the impasse because these are too small, as are the flows from the Mrs Watanabe’s out there.

So, if the market seemingly lacks the traders and the gumption to take on the BoJ at the 150 level, does this mean it’s never going to be broken, or at least not in a decisive way? That’s possible, but as long as this big yield gap exists at the long end of the bond market and as long as high hedging costs force bond investors to leave FX exposures unhedged, it looks as if the pressure for US dollar/yen to move above 150 will become irresistible at some point – and this point may well be today.