The Japanese yen staged its biggest rally in months after what appears to have been intervention by Japan's Ministry of Finance (MOF). With USD/JPY suffering its largest one-day decline since April, the focus now shifts to whether today's Bank of Japan meeting can reinforce the yen's momentum.
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Suspected MOF Intervention Overshadows the BOJ Meeting
Technically, we need to wait for the official data before confirming whether Japan’s Ministry of Finance (MOF) intervened in the currency market on Thursday. That said, most can probably assume it did with a cursory glance at their Japanese yen charts. The extreme volatility seen on Thursday was of a similar magnitude to that witnessed when the MOF intervened on April 30.
Source: ICE, LSEG
- USD/JPY fell almost 600 pips from the day’s high to an 11-week low, dropping below 160 before finding support just above its 200-day EMA. In fact, its daily range was wider than that seen during the April 30 intervention.
- EUR/JPY also required its 200-day EMA to come to the rescue amid a 530-pip selloff, with its daily range effectively matching that seen during the April 30 intervention.
- GBP/JPY also fell back to its prior intervention lows, although it was a relatively unconvincing underperformer as it failed to test its 200-day EMA.
- AUD/JPY fell more than 300 pips before finding support around 111.30, near its prior intervention low.
- CAD/JPY briefly traded below its 200-day EMA before recovering back above it, although it now sits in line with its April 30 low.
BOJ Meeting in Focus After Intervention Fears
The focus now shifts to today’s Bank of Japan (BOJ) meeting, although much of the excitement may already be behind us. The BOJ is widely expected to leave its policy rate unchanged, placing the emphasis on Governor Ueda's guidance. If policymakers want to capitalise on the yen's renewed momentum, even a slightly hawkish tilt—such as higher growth or inflation forecasts, or guidance that leaves the door open to further tightening—could help extend Thursday's gains.
That said, intervention days rarely get followed by levels of volatility even remotely close. We typically find that price action remains well within the range of intervention day, and daily ranges tend to trend lower in the days ahead. Interestingly, USD/JPY tends to close marginally higher the day after, though none of the post-intervention daily returns are convincing enough to be deemed as anything other than noise following a shock event. So while the BOJ meeting might add some spice, I do not anticipate we might see anywhere near the levels of volatility we saw on Thursday. Which is useful to know, if one wants to manage ones own expectations to fine tune risk management.
Source: ICE
Extreme Yen Short Positioning Left Traders Vulnerable
Traders were arguably too short the Japanese yen in the futures market, according to the latest Commitment of Traders (COT) report. Gross short positions among asset managers increased by 23.5k contracts (18.3%) last week alone, while large speculators added another 21.1k contracts (8.8%). For both groups, gross shorts approached record highs, while net short exposure climbed to a two-year high. Although it is difficult to pinpoint an exact turning point using COT data, the conditions for a reversal—or at least a bearish shakeout—were clearly in place.
Source: CFTC (COT), CME, LSEG
USD/JPY Technical Analysis: US Dollar vs Japanese Yen
It is tricky to have a directional bias for today given the dynamics leading into today’s BOJ meeting. I have therefore included potential support and resistance levels I suspect professional traders may be using to tread around. Note that momentum has turned higher into the end of the US session, and that support eventually found at the May VPOC.
The 160 makes a potential upside target or resistance level for bears, alongside the July low at 160.44. In the event that USD/JPY bulls somehow recover some decent ground, the monthly pivot point sits at 151.50. Thoug being the last day of the month means this technical level will be gone by the weekend.
Note that the monthly S1 pivot is just above 158, a break above which brings 157 into focus.
Source: ICE, TradingView
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-- Written by Matt Simpson
Follow Matt on Twitter @cLeverEdge
