USD/JPY Following the Path of Least Resistance

USD/JPY Talking Points:

• It’s been a buy the dip backdrop so far in USD/JPY although bulls haven’t yet mustered the drive to test above the 160.00 handle in the pair.
• While the threat of intervention remains very real the prospect of fundamental divergence remains in-place, as US inflation of 3.4% is above target, leading to rate hike expectations from the Fed and inflation in Japan at 1.7% drives lacking confidence that the BoJ will be able to stay with policy tightening for long.

This content was created by an affiliate of FOREX.com and represents the views and opinions of the author/speakers, not the views and opinions of Forex.com, StoneX Group Inc., or its subsidiaries. The content has not been independently reviewed by FOREX.com.

The shock and awe of the dual intervention from the BoJ and the US Treasury Department has given way to the incremental pushing of the envelope from market participants. And this really highlights the central issue behind the USD/JPY carry trade, as the two economies are so incredibly different given demographics and economic drivers that one must question what a ‘fair value’ of the spot rate should be.

Granted, Japan choosing to avoid any rate hikes when CPI was at or above 4% back in 2022 likely plays somewhat of a role in our current saga, but the reality is that with an aging population and decades of economic friction Japan simply has a less viable case for higher inflation expectations down-the-road. And to be sure, actual inflation is a completely different story in each economy at the moment, with Japan most recently showing a 1.7% headline CPI read against the US’s 3.4% from last week.

This puts the US in the uncomfortable position where hiking rates should not be out of the conversation while in Japan, the BoJ’s mandate does not demand for the same. This therefore says that spot rates in the USD/JPY pair could be justified higher, but that’s a point of discomfort for both the US and Japan. For Japan, a weaker Yen brings the possibility of unsavory levels of inflation while in the US, a stronger Dollar makes for less favorable trade relationships. Ideally, I think both sides would like to see the USD/JPY pair closer to a 145 or 150 level but at this point it’s the 160.00 spot rate that’s the proverbial line in the sand.

USD/JPY Weekly Price Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/JPY Natural Forces v/s Exogenous Pressure

I’ve covered this before but at this point I think it can be argued that the long side of USD/JPY comes with a theoretical cap, as it seems unlikely that both the BoJ and US Treasury Department will accept a public display of weakness by allowing USD/JPY to drive through 165. And that statement can be spanned down to 164, and possibly even 160, as, so far, we’ve seen a reticence from buyers to test above that big figure.

But – like I looked at just after the intervention, USD/JPY on pullbacks makes for an attractive trend-side setup, as probabilities of an intervention are lower following a large counter-trend move, there’s likely a lot of shorts that need to cover and there’s still the fundamental bias in the direction of the high-yielder.

And that doesn’t change until fear overtakes the matter, similar to what showed in November of 2022 or 2023, or then in July of 2024.

With a crowded trade we can see a crowded exit but there first needs to be a push factor of fear and larger losses. What could do that here would be a dimming in US data, which we saw last week albeit to a minor degree. And that was at least partially offset by a slew of hawkish Fed comments which is probably surprising considering the bank’s traditionally dovish posture.

Another factor that could possibly unsettle that trend would be stronger inflation in Japan, and we’ll get the next data point on that item on Thursday evening. Core CPI is expected at 1.8% so, still below the bank’s 2% target, but with 10-year yields approaching 3% there may be some newfound motivation from Yen bulls.

For now, there’s higher-highs to go along with horizontal resistance so buyers remain in-control of near-term trends. If or when that sequencing of higher-lows breaks, we may be on the cusp of something larger but that’s not a scenario that’s presented itself yet.

If we do see bulls push a breakout, the 160 level is the next major spot of emphasis but that doesn’t mean an automatic response from authorities, and this then pushes that theoretical line-in-the-sand up to a 160.64 area, or perhaps the 161.95 high that was in-play back in 2024 before the BoJ intervened.

USD/JPY Four-Hour Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Market Analyst, Global Macro