USD/JPY Talking Points:
- A little more than a month ago I looked at the building contrarian case in USD/JPY, highlighting the 160.00 level as an area of note after a coordinated intervention from the US and Japan.
- More recently, some pointed comments from US Treasury Secretary Scott Bessent have shown relevance as he highlighted his asymmetric access to information, saying “I am the house,” and “you can bet against me if you want.”
- This doesn’t necessarily spell doom-and-gloom in USD/JPY but it does provide a theoretical cap to upside, such as we looked at a month ago, and that’s something that can play out for reversals as longs are limited in the near-term and that can compel longer-term carry trades to close positions.
- US CPI prints have been a big part of USD/JPY reversals over the past four years.
The center of the FX market remains the USD/JPY carry trade and, so far, bulls have held on relatively well. To be sure the pair has pushed down by more than 1,000 pips in the past six weeks which may not sound like buyers are holding the bid, but given the backdrop and the fact that we haven’t seen a larger case of unwind, I think credit should be given to the fact that buyers have, so far, responded to pullbacks quite well.
With that said, it does seem as though the tide has shifted and one look at the weekly chart helps to illustrate, as this has very much been an ‘up the stairs, down the elevator’ type of dynamic over the past four years.
Interestingly, it was US CPI that drove key reversals in 2022, 2023 and 2024 and tomorrow brings another iteration of that data point to the fray for US markets.
USD/JPY Weekly Price Chart
Chart prepared by James Stanley; data derived from Tradingview
USD/JPY and the Prospect of Asymmetry
This was a central point of what I looked at in the immediate aftermath of the intervention in July, and then again in early-August when I explored the contrarian case around USD/JPY.
While fundamentals remain tilted to the long side of the pair, and with core US inflation coming in around 3.4% at the last read while Japanese inflation remains below 2%, there’s not much motive for bigger picture policy reversals. US markets are pricing in the prospect of rate cuts and technically, given inflation, the Bank of Japan should be holding flat. But, rumors indicate that the BoJ will be hiking rates this month despite the fact that inflation is already below their target. And if the BoJ does hike with inflation already low, are markets really going to build out the expectation for even more hikes, with inflation below target and policy tightening likely to impact that further?
In reality the problem can be driven back to demographics as an aging and declining population in Japan is simply an uphill battle for establishing growth and this is very much behind the struggles of the past forty years, which have led to significant turmoil in Japanese politics.
This is the kind of thing that can’t simply be solved by a 25 bp rate hike at the BoJ’s meeting later this month.
Nonetheless, the heavy hand of intervention can and has played a role and this is something noteworthy for bulls as those getting long in the pair have a theoretical cap to upside. This was the central premise of the piece back in August, highlighting the 160.00 level as that spot where policymakers could react to tamp the trend. And whether that was intervention or just unwind from traders cutting longs, that test above the big figure last week turned into a seven-hundred pip tumble that the market still hasn’t yet recovered from.
USD/JPY Daily Chart
Chart prepared by James Stanley; data derived from Tradingview
USD/JPY Buy the Dip into Sell the Rip
It’s not quite a one-sided case at this point and that fundamental bias noted above is the big reason why. This can shift, of course, as the first chart in this article shows multiple reversals in the pair triggering after US CPI prints. And it doesn’t even really need to be a US CPI print that denotes oncoming cuts, as the simple push towards ‘less hawkish’ could be enough to reset matters. This is what triggered a 2,000+ pip reversal back in November of 2022, with headline CPI printing at 7.1% but propelling a massive sell-off that lasted for the next two months.
Perhaps the bigger question here, to bring it back to the comment from Bessent, is who wants to bet against the Treasury Secretary? This then begs the question as to whether prior spots of support will show as resistance, such as the 155.155.23 area or perhaps the 156.68-157.22 zone.
For now, bulls are making a move on shorter-terms following yesterday’s higher low – which, notably, printed even after the threat from Bessent. From the below four-hour chart we can see a higher-high and now a possible higher-low, which sets up for tests at those larger zones around the 155 handle or the 156.68 zone.
USD/JPY Four-Hour Chart
Chart prepared by James Stanley; data derived from Tradingview
--- written by James Stanley, Senior Market Analyst, Global Macro
