Japanese Yen Outlook: USD/JPY Plunge Loses Steam, but Risks Remain

USD/JPY is trying to stabilise after its sharpest four-day loss in nearly two years, but the outlook remains fragile. Japan's intervention, backed by the US Treasury and supported by a new Fed repo facility, has increased the credibility of future yen-buying operations, leaving traders alert for opportunities to fade rallies.

 

 

Why USD/JPY Risks Remain Despite the Sharp Selloff

Fed Support Adds Weight to Yen Intervention

The -3.2% loss for July marked the worst month for USD/JPY in fifteen and its most volatile trading range in six. Most of that loss occurred in the final two days of the month, thanks to intervention from Japan's Ministry of Finance (MOF) and support from the US Treasury. Traders remain on guard for further declines after the MOF vowed to intervene again, with the Fed making that easier by opening a repo facility for Japan. This allows Japan to borrow US dollars against its Treasury holdings to buy yen instead of selling US Treasuries, removing a key constraint on future intervention.

In simple terms, the facility gives Japan greater firepower to sell US dollars and buy yen, increasing bearish pressure on the greenback if authorities intervene again.

Source: ICE, TradingView

 

History Shows MOF Intervention Can Trigger Sharp USD/JPY Declines

The weekly chart shows how deep USD/JPY corrections have been following MOF interventions. The pair has already fallen 5.3%, surpassing the post-intervention decline seen in April, although it still trails the deeper selloffs following MOF action in October 2022, November 2023 and July 2024.

Whether we'll see declines of a similar magnitude this time remains debatable, given the potential for further Fed rate hikes and persistent inflationary pressures from higher crude oil prices amid ongoing Middle East tensions. However, with the US Treasury and Fed backing Japan, MOF jawboning is more likely to cap rallies, while any future interventions now carry greater credibility. That could keep USD/JPY and other yen crosses firmly on traders' 'fade the rally' watchlists.

 

 

 

USD/JPY Technical Analysis: US Dollar vs Japanese Yen

The daily chart shows the intense two-day selloff on Thursday and Friday culminated in a volatile doji. Notably, the session low held above the 155.00 handle, the May low and the monthly S1 pivot point. With the daily RSI also deeply oversold, bears may want to tread cautiously around these lows.

The 1-hour chart shows prices grinding higher in what could be a corrective pattern, while declining volumes suggest a lack of conviction among bulls. Even so, they may still attempt a move towards the 200-period EMA. If the MOF allows, a break above 158.00 brings the high-volume node (HVN) and monthly pivot point into focus around the 159.00 handle.

Should prices bounce from here, bears may look to fade rallies into those resistance levels, particularly with the backing of the MOF and Fed. A break below 155.00 would then bring the January low near 152.00 into focus.

Source: ICE, TradingView

 

 

 

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge