Synopsis:

ING evaluates the potential for a large-scale, coordinated intervention in Asian foreign exchange markets in response to the recent surge in the USD. With the Japanese yen and Korean won experiencing significant depreciation, finance ministers from Japan, Korea, and the US have expressed serious concerns, suggesting a heightened readiness for intervention to stabilize these currencies.

Key Points:

• USD/Asia Dynamics: The strong March CPI and retail sales data in the US have significantly influenced USD strength, impacting Asian currencies. While the PBOC has maintained stable USD/CNY fixings above 7.10, the broader question of potential renminbi depreciation remains open.

• Regional Currency Weakness: The Japanese yen and Korean won have notably weakened, leading to increased vocal concerns from respective finance ministries. Recent discussions, including a trilateral meeting with the US, have focused on this issue, highlighting the seriousness of the currency depreciations.

• Historical Context of Interventions: The Bank of Japan and Bank of Korea have previously intervened in the FX markets to stabilize their currencies, with substantial amounts being spent to curb volatility. The BoJ's intervention in 2022 involved selling approximately $70 billion, while the BoK's quarterly interventions ranged between $2 billion and $6 billion last year.

• Prospect of Coordinated Intervention: The recent trilateral meeting raises the possibility of simultaneous interventions by Japan and Korea if USD/JPY and USD/KRW continue to trade at high levels in a disorderly manner. This coordination could be a strategic move to mitigate further depreciation against the dollar.

• Global and Domestic Factors: External pressures such as Federal Reserve rate hike expectations and geopolitical tensions in the Middle East also contribute to the strong demand for the dollar, complicating the effectiveness of potential FX interventions.

Conclusion:

While coordinated intervention by Japan and Korea could temporarily stem the tide of their currencies' depreciation against the dollar, a true reversal in trends may require significant shifts in global economic conditions.