Apr 8, 2024
Yen Intervention Risk Puts Focus on Fed’s Swelling Cash Pile
, Bloomberg News
(Bloomberg) -- Japanese authorities will probably need to sell Treasuries in the event they step in to support the beleaguered yen, rather than just tapping cash parked in a key Federal Reserve facility, according to Citigroup Inc.
Use of the Fed’s foreign reverse repurchase agreement facility — where global monetary officials keep cash overnight — has swelled by about $32 billion in the past three weeks, reaching a three-month high of $365 billion.
The influx sparked speculation that Japanese policymakers were boosting their dollar cash holdings in preparation for a move to buoy the yen, which is trading near a 34-year low approaching 152 per dollar. But the increase in stockpiled funds is probably temporary, related to quarter-end and a long US holiday weekend, according to Wrightson ICAP.
What’s more, 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 strategist Jason Williams wrote in a report Monday. “Hence, we expect some sales of front-end T-bills or coupons if there is intervention in the yen surpassing 152.”
Monetary authorities such as the Bank of Japan can keep funds in the Fed facility earning interest instead of in Treasury bills and other securities. And when they need to do deploy dollars, they can just withdraw the money from the facility without ruffling markets.
Read more: Japan FX Chief Calls Yen’s Slump Unusual, Vows to Act if Needed
Wrightson’s Lou Crandall also noted the facility was probably attractive because it serves as an end-of-day sweep account, and was accessible when US markets were closed March 29 for the Good Friday holiday.
There’s another telling sign that Japan didn’t play a role in the quarter-end spike in this cash pile, Crandall pointed out: Data for March released last week by Japan’s Ministry of Finance showed a drop in cash holdings at foreign central banks, suggesting the increase in funds held at the Fed was driven by other countries.
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