Trade Of The Week: USDJPY monster move fuels intervention talk

• USDJPY tumbles 500 pips!
  

• Yen rebound sparks intervention talk

• Watch out for Japan data & USD volatility
  

• More wild swings on horizon?

• Key level of interest at 155.00

Everybody is talking about the Japanese Yen, and why not?

Its dramatic reversal against the dollar has sparked talks around possible intervention by Japanese authorities.

However, with no announcements made so far and Japan’s top currency official having “no comments for now”, market watchers may be left scratching their heads for the time being. The thin liquidity thanks to a public holiday in Japan has also been flagged as a reason for such aggressive price moves.

Nevertheless, the USDJPY has earned a place in our “potential monster movers”, especially after we cautioned over possibly volatility last week.

What exactly happened?

On Monday morning, the USDJPY timebomb exploded after hitting an intraday peak of 160.22.

After a period of consolidation, prices collapsed roughly 500 pips within a 4-hour window.

What could happen next?

Investors will have their ears to the ground for any official announcements from Japanese authorities.

Attention will also be directed towards Japan’s Ministry of Finance’s monthly intervention data which will confirm whether intervention took place or not, and if so – by how much.

USDJPY set for more wild swings?

Given how this is an event-heavy week for the USD, more wild movements could be on the horizon for the USDJPY. Speculation around government intervention may add to the potent cocktail of themes that could lead to more volatile price movements.

With all the above said, keep an eye on these 3 factors:

  1) Key Japan data

Incoming data from Japan could add more fuel to the Yen’s volatility.

Investors will direct their focus towards the latest unemployment figures, industrial production, and retail sales which could offer fresh insight into the health of the economy. Should these reports also impact bets around when next the BoJ will hike rates in 2024, this could spark more currency movements.

Traders are currently pricing in a 25% probability of a 10-basis point hike in June with this jumping to roughly 80% in July.

• Should overall data support the case around the BoJ hiking rates again in the Summer, this could boost the Yen – dragging the USDPY lower as a result.

• Should data disappoint and rate hike bets cool, the USDPY may push higher as the Yen weakens.

  2) Dollar volatility

It’s a big week for the dollar thanks to the Fed rate decision and US jobs report.

Over the past few weeks, the dollar has appreciated as economic data and hawkish Fed officials cooled expectations around lower US interest rates in 2024.

Traders are only pricing in the first rate cut by November with the probability of another cut by December around 45%.

This is a big deal due to the wide gap between Japan’s and the United States’ interest rates, which has been behind the USDJPY’s upside.

• The USDJPY could push higher if the Fed meeting and US data support the “higher for longer” argument on rates.​​​​​​​

• Should the dollar weaken on disappointing data and a dovish Fed, this may send the USDJPY lower.

  3) Technical forces

The aggressively bearish daily candle signals further downside for the USDJPY.

However, for bears to truly seize control – a solid daily close below the 155.00 support is required.

The Relative Strength Index has already slipped back below 70, after being heavily overbought since early April.

• Sustained weakness below 155.00 may open a path back towards 154.20 and 153.60.

• Should prices push back above 157.25, this may encourage a move back towards 158.40 and 159.00.​​​​​​​

Bloomberg’s FX model forecasts a 77% chance that USDJPY will trade within the 152.35 – 159.04 range over the next one week.