Japanese Yen, USD/JPY Talking Points:
- USD/JPY remains near 150.00 and today saw a quick test above the big figure before price put in a retreat.
- The tension is thickening as USD/JPY bulls have continued to hold higher-lows yet the pair hasn’t been able to show sustained bullish break above 150.00. There’s lingering fear of intervention risk beyond that level and as we saw earlier in the month, stop runs can be brutal as the pair fell by more than 260 pips in less than five minutes after testing above 150.00.
- USD/JPY bulls hadn’t dared to re-test that price in the three weeks since the last instance, until today.
- I’ll be discussing these themes in-depth in the weekly webinar on Tuesday at 1PM ET. It’s free for all to register: Click here to register.
USD/JPY has just tested above the 150 level for the first time since October 3rd, and that prior instance was the first time that level had traded in a year. In both instances, bulls were treated quite rudely as last year’s test led to a 2,000+ pip decline while the most recent iteration showed just before of a 260+ pip sell-off in less than five minutes.
To properly set the stage: Monetary policy remains decisively tilted to the long side of the pair, and the carry trade has continued to draw in bulls as the rate differential between the US and Japan has been difficult to ignore. To be sure, this isn’t a new thing, as it was the same rationale for the pair’s incline in 2021 and the first nine months of 2022, and it came screaming back in January of this year and the pair has been trending-higher ever since.
The Bank of Japan, up to this point, has avoided any changes to monetary policy and given the bank’s Yield Curve Control policy that’s built a massive portfolio of Japanese Government Bonds, any changes will likely come with consequences. We’ll hear more from the BoJ next week, just ahead of the FOMC rate decision scheduled for Monday, but for now traders have another issue to contend with and that’s the 150.00 re-test that’s currently taking place.
On the below chart, we can see price action wedging deeper into an ascending triangle formation. These formations are often approached with aim of bullish breakout. The complication, of course, is the prospect of a intervention-led reversal taking place if that breakout begins to show.
USD/JPY Daily Price Chart
Chart prepared by James Stanley, USD/JPY on Tradingview
Will the Bank of Japan Intervene to Defend 150.00?
Nobody knows, except for perhaps some members of the Japanese Ministry of Finance or the Bank of Japan.
Apologies for the cheap answer but that’s the only honest one that I can think of.
The Bank of Japan is not in a great spot and given that the country has finally started to see some economic growth after a rough 30ish years of deflation and slow growth. So while many developed economies were frightened of choking off growth with rate hikes in 2021, even as inflation flared, that fear has even more context in Japan and policymakers don’t seem to be taking this economic hope for granted.
Intervention is not an ideal strategy for the bank as it, in essence, involves burning finite capital reserves to push a market in the opposite direction of what their own monetary policy is encouraging. And not ever intervention goes as successfully as last years and arguably, last year’s instance was massively boosted by some help from the US Dollar and inflation in the United States.
If we look at that instance for clues, it wasn’t even the exact 150 level that brought out the ire from the Ministry of Finance: There was a single daily close above that level on Thursday, October 20th last year, when price closed at 150.14 for USD/JPY. It was the next day that really seemed to get the bank’s attention as the lack of pullback seemed to bring even more bulls to the matter and that led to a fast breakout of almost 200 pips until, eventually, the MoF brought out the intervention hammer.
That Friday, October 21st showed a low at 146.32, and that remained as a sense of support in the pair for the next three weeks.
What finally broke the pair down was the CPI print released on November 10th, and the entire USD-complex went for a ride as the Dollar pulled back, EUR/USD broke out and USD/JPY began to break down.
At that point, the carry didn’t matter as much as there was a very real risk of pricinpal losses to bulls. And as the old saying goes, the exit door in a movie theater is only so wide, and the minute you smell trouble it’s probably advisable to start thinking of exit before you get left behind.
That explains the next two months of price action in the pair as the carry unwound until, eventually, support showed at the 50% marker of the 2021-2022 major move.
USD/JPY Daily Chart
Chart prepared by James Stanley, USD/JPY on Tradingview
A Different Backdrop
Last year’s intervention out of the BoJ was not only well-timed but it also seems that there was some good fortune on the macro-front, as well, as the USD trend began to pullback in Q4 and bulls largely remained on-hold until July of this year. CPI had started to soften, and this gave hope that the Fed may be nearing complete for that rate hike cycle. A year later and here we are, and this presents a differing scenario for the Bank of Japan from what was seen last year.
The US Dollar at this point retains bullish potential as price has built a falling wedge very near a key spot on the chart. So, while the BoJ had the benefit of USD-weakness showing less than a month after last year’s intervention, the prospect of another bout of USD-weakness this year in the current environment seems more difficult to project. US Yields have been spiking-higher and economic data has remained strong, to the degree that another rate hike this year can’t be ruled out.
On the part of Japan, it seems most BoJ watchers are still expecting the bank to hold with their passive policy outlay but we’ll hear more about that next week at the October BoJ rate decision.
Low liquidity potential can bring high risk to both sides of USD/JPY
Given the continued hold of 150.00, I expect that there are many retail traders holding short positions in the pair in hope of some form of intervention. And if that’s the case, that could entail stops being set above the big figure and stops on short positions are buy orders. So, if price does pierce the 150 level and if there are a batch of stops sitting above that price, it could reasonably create even more demand to further fuel a spike in price.
So while a short stance may seem low risk, given the ability to place a stop at 150.10 or something along those lines, traders need to take into account that there will likely be very low liquidity at that point and a 150.10 stop could get slipped by quite a bit. The move last year once price held above 150 showed fast acceleration and ran all the way up to near 152.00 before prices finally topped.
And on the long side, a similar fear remains and there was a lesson just three weeks ago of what could happen in such a scenario, when a quick test above 150 that could not even hold for ten minutes, was quickly and aggressively faded as the pair then fell by more than 260 pips in less than five minutes.
These aren’t simple situations for the trader to work through and traders should remain cautious on either side of the trade.
--- written by James Stanley, Senior Strategist
