G10 FX Weekly: Long USD/JPY Under Threat as Japan’s MoF Lurks

Summary

• Yesterday, USD/JPY traded to its strongest level since 1990 (on an intraday basis).
• This prompted the Japanese Ministry of Finance (MoF) to verbally intervene (following further pushback earlier this week) to combat JPY weakness.
• This makes it much more likely that the MoF will buy JPY in the market, as verbal pushback has only had limited effectiveness.

Market Implications

• Bearish USD/JPY. We think further upside in USD/JPY is limited with the MoF lurking. Therefore, we tactically prefer downside in the pair.

USD/JPY Trades at 34-Year High …

USD/JPY printed an intraday high yesterday at 151.97, the highest level since 1990.

Chart 1: Orange Line = USD/JPY Spot Price

… And Japan’s MoF Has Noticed

Not only has USD/JPY traded at this multi-decade high, but the pair has also accelerated sharply in recent weeks, rallying ~3.5% since 11 March and ~7.5% year-to-date (YTD).

Chart 2: Orange Line = USD/JPY Spot Price

We think the rally’s pace was what really focused attention at the Japanese MoF.

Yesterday, the MoF, the BoJ and the Japanese Financial Services Agency held an emergency meeting to discuss the weak yen. The MoF suggested it was prepared to intervene in the currency markets, with the BoJ also ready to adjust monetary policy.

Also, Finance Minister Shunichi Suzuki said authorities could take ‘decisive steps’ against yen weakness – language he has not used since 2022 when Japan last intervened in the market.

This latest MoF messaging has increased speculation that Japanese officials are very close to actual intervention.

Given verbal intervention has had a limited impact on USD/JPY and other JPY crosses, actual MoF intervention seems inevitable.

We Think USD/JPY Upside Is Limited

We see USD/JPY upside as limited.

True, the main reason for USD/JPY heading higher remains in place. Interest rate differentials favour the USD, making the pair one of the most popular carry trades. Yet this means it is very likely the market will force the MoF to intervene.

For the MoF, failing to intervene after such aggressive verbal intervention would encourage speculators to sell yen. This could trigger a vicious rise in USD/JPY, which we think they will want to avoid.

Therefore, we think FX intervention is highly likely. This would open up downside in the pair, so we like playing USD/JPY from the short side.

For traders, going long at current levels is risky, as the risk/reward profile is skewed against them. For those who have been long from much better levels, current prices a near multi-decade high present an opportunity to take profit.

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Richard Jones writes about FX and rates markets for Macro Hive. He has traded and invested in interest rate and FX market portfolios spanning three decades, both on the buy-side and sell-side.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)