Euro hits 25-year high against the Japanese Yen! Citigroup warns: Approaching 180 may trigger intervention

Recently, the US dollar against the Japanese yen has just moved away from the alert level of 160, while the euro against the Japanese yen is approaching the "intervention line" again?

Citigroup analysts warned in a recent research report that if the euro against the Japanese yen exchange rate approaches 180, the Japanese authorities may intervene in the foreign exchange market and sell euros.

On July 11, the euro against the Japanese yen touched 175.43, hitting the highest record since the introduction of the euro in 1999. The exchange rate has since fallen back slightly and is currently hovering around the 171 level.

On the same day, July 11, it was reported that the Japanese authorities intervened in the foreign exchange market for the third time this year to support the yen against the US dollar exchange rate. The next day, the Bank of Japan conducted an interest rate check on the euro against the Japanese yen, and then allegedly intervened in the US dollar against the Japanese yen. Interest rate checks usually indicate that Japan is ready to intervene in the foreign exchange market.

Citigroup pointed out that since the Japanese authorities intervened in the US dollar against the Japanese yen exchange rate in September 2022, the euro against the Japanese yen exchange rate has risen by about 30 yen, compared to an increase of about 10 yen for the US dollar against the Japanese yen during the same period.

Citigroup analysts including Osamu Takashima stated, "Given the significant rise in the euro/yen, there is a high possibility of Japan intervening in this currency pair." The analysts said that once the US dollar against the Japanese yen rebounds to around 165 and the euro against the Japanese yen "threatens" the 180 level, they would not be "surprised" by the Japanese authorities selling euros.

Citigroup estimates that 20%-30% of Japan's foreign exchange reserves are in euros. As Japan has been selling dollars to defend the yen over the past two years, the country may also reduce its euro reserves to avoid reserve allocation imbalances.

However, historically, Japan has rarely intervened in the euro. The impact of intervening in the euro may also be far less than intervening in the dollar. Citigroup stated that due to limited euro trading volume and liquidity, any intervention in the euro against the Japanese yen may be much smaller than intervention in the dollar against the Japanese yen. To more effectively defend the yen, selling dollars is still necessary.

At the end of this month, the yen will face a major test when the Bank of Japan announces its policy decision. Any dovish hints from the bank could be a reason to resume shorting the yen. Citigroup expects that due to the potential significant impact of the meeting, investors will remain cautious ahead of the Bank of Japan's policy meeting on July 30-31