USD/JPY Outlook: Testing the MoF Zone as Intervention Risk Intensifies

• USD/JPY back testing intervention zone around 157.30
• Sharp drops have been seen in very early European trade recently
• Japan, China remain offline, creating poor liquidity conditions
• US-Japan yield spreads and energy backdrop favour buying dips

Testing the intervention zone

USD/JPY finds itself back testing the zone Japan's Ministry of Finance (MoF) has likely instructed the Bank of Japan (BOJ) to intervene in, following the initial episode last Thursday that saw the pair dump from above 160 to below 156 in rapid fashion.

As seen in the five-minute tick chart below, price action is consistent with intervention not only taking place at a familiar level but also at certain times in the Asian session, with abrupt pullbacks often occurring into the very early stages of European trade. There's no guarantee the pattern will continue, but it provides something akin to a blueprint for traders to use when assessing near-term directional risks.

Source: TradingView

Risk-reward favours patience

Before looking at specific setups, in an environment such as this, capital preservation should be at the forefront of every decision. If you get it wrong coming up against a central bank armed with trillions in foreign reserves, it can be costly and then some.

Based on price action over recent days, we've seen abrupt declines take place when the price has moved towards 157.30, which happens to coincide with the location of the 100-day moving average, shown on the daily chart below, so that's an immediate level overhead to pay attention to. For those who think the likely intervention pattern will continue, shorts could be set on probes of the level with a tight stop above for protection should the wall of offers fail to materialise.

Source: TradingView

As for targets, we've now seen three probes beneath 156 over three consecutive days, making it a logical point to take profits. It also looms as a decent level to consider long setups from, given shorts in the current environment go against the prevailing fundamental macro view. If we were to see another abrupt push beneath 156.00 towards minor support at 155.64 that fails to extend further, longs could be established with a stop beneath the recent lows for protection, targeting 157.30.

This setup screens as more appealing, not only because of the clean range that's been established over the past few days but also the knowledge that rate differentials are swinging back in favour of the United States, as seen in the spread between two and five-year US and Japanese bond yields in the chart below.

Macro backdrop supports USD

The US also has a fundamental advantage of being a net energy exporter, even if not totally self-sufficient when it comes to crude oil. That puts it in a very different place to Japan, which is a major net energy importer, leaving it exposed not only to higher prices but also scarcity concerns and weaker international demand for Japanese manufactured goods the longer the Strait of Hormuz remains shuttered.

The yen should be pressured given the environment, making buying dips look far more appealing on fundamental grounds rather than playing it from the short side, which is currently reliant upon continued intervention or verbal warnings.

Source: TradingView

After a slow start to the week, we're now at the point where the macro calendar starts to pick up ahead of the release of US nonfarm payrolls on Friday. Rather than go over old ground, for those interested in what may be influential and what comes across as merely noise, I'd direct you to the weekly primer I wrote over the weekend.