Risk of USD/JPY spike increases amid more verbal intervention

USD/JPY has been trading in a tight range for much of the past week as the Japanese yen’s recent propensity to strengthen has been counterbalanced by a series of verbal warnings emerging from Japan regarding the likelihood that the country would intervene to weaken the yen. As the Japanese-hosted G7 meetings approach, these hints have become more frequent and vocal, potentially telegraphing an impending intervention move by Japan.

Several such verbal indications were issued last week from Japanese officials, with the latest having occurred on Monday. A key vice finance minister, Masatsugu Asakawa, asserted that an intervention would be justified if the economy is faced with exceptionally volatile currency moves, despite a recent US Treasury report warning against what the US deems as unfair exchange rate policies by Japan and others.

Although bold intervention talk by the Japanese government cannot be relied upon to sustainably pressure the yen – and for that matter, nor is an actual intervention guaranteed to produce the desired yen-weakening effect – Japan’s recent verbal intervention does potentially increase the risk of some action by Japan that could lead to a quick drop in the yen and corresponding spike for USD/JPY.

Despite the possibility of such a spike, USD/JPY has continued to trade in a well-defined downtrend characterized by lower highs and lower lows since late last year. Since early May, however, the currency pair has risen from its new long-term low of 105.54, as the dollar has recently rebounded and concerns over an intervention have pressured the yen.

As of Monday, USD/JPY had been fluctuating for nearly a week in a tight range above and below the 109.00 level. The rise from the early May lows has lifted the currency pair closer to major resistance at the 110.00 psychological level, which is also around where its 50-day moving average is currently situated. In the absence of a near-term intervention action by Japan, any turn back down from around this key resistance could prompt a move towards a continuation of the strong downtrend that has been in place since late last year. The key bearish target on any such downside extension continues to be at the 105.00 support objective. However, any actual intervention-driven spike that breaks out above 111.00 resistance could potentially prompt a surge back up towards the 114.00 resistance area.

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