USD/JPY Pulls Back as Yields, USD Fall on Treasury Buyback Announcement

USD/JPY Talking Points:

• As looked at in yesterday’s webinar USD/JPY is still very much a cat and mouse game, with positive carry on the long side of the pair but a very visible intervention from the BoJ and perhaps more powerfully the US Treasury Department.
• USD/JPY started the day pushing towards 160.00 but the announcement helped to draw a pullback, and the pair is now holding support at a familiar area around the 158 handle.
• While it’s clear that both the UST and BoJ would like to see a weaker spot rate for the pair, longs have continued to hold on until greater evidence of a fundamental shift appears – or unless either economy takes more convincing direct action – there could be a case for short-term bullish trend strategies as buyers have continued to bid pullbacks.

USD/JPY retreated to a familiar area today with the 158 zone quickly coming back into play. This broke a streak of higher-lows and the pair was stepping closer to the 160.00 level before the pullback appeared. And while the earlier announcement of increased Treasury buybacks does make for a less attractive backdrop for long USD and, in-turn, long USD/JPY, the fundamental deviation in the pair continues to exist and this can keep bulls bidding support in the near-term, although it highlights a growing issue for USD/JPY traders.

With both the BoJ and US Treasury Department stepping in on the matter, it’s clear that both want to see lower spot rates in the pair. Now, like I said just after the intervention, that didn’t necessarily obviate 155 as support, as it was unlikely that we would see continued intervention after such a steep fall. But – it does provide for a theoretical cap to upside, as re-approaching those prior highs at 164 or perhaps even just re-approaching the 160 level could elicit such a swing from policymakers.

We saw that dynamic at work as buyers continually stalled before a 160.00 test, but, like I showed in the webinar yesterday without some form of shock it was likely that bulls would eventually go for that test. Well, the shock arrived this morning and now the big question is whether it’s enough to frighten longer-term position holders into closing long USD/JPY positions and going flat.

USD/JPY Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/JPY Where Does the Shift Begin to Show?

Tomorrow afternoon brings a CPI print out of Japan and that can take on newfound importance. While expected at 1.8%, prior rumors of a rate hike from the Bank of Japan could be bolstered by stronger inflation, which could then serve to provide another shock factor to longs holding positions.

As I covered in the past, interventions can be great for stalling rallies but for eliciting reversals, at least in the recent past, there’s needed to be a shift in the fundamentals or the perceived fundamentals between the two economies. And with US inflation at 3.4% against last month’s 1.7% in Japan, that deviation just did not exist, and still doesn’t, really.

But, the more weakness that shows in US data or the more strength that shows in Japanese inflation and that relationship can shift to the point where longs suddenly want to cut bait.

But, perhaps more importantly, prices aren’t a perfect manifestation of fundamentals, and it’s the positioning in the market that matters most. Likely, at this point, there’s probably a considerable number of stops sitting below the 155.00 handle and if those stops get hit, that’s an oncoming rush of supply that could quickly send the pair spiraling lower. That would expose the next zone below that at 151.95 and there’s probably even more stops sitting below that, as the prior 2022 and 2023 high was back in as support in February of this year.

USD/JPY Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/JPY Shorter-Term

Given the newness of the shock perspective is often helpful. But, noticing differences is, too, and at this stage, one important distinction between the support test at 158.08 and prior bounces is the fact that sellers have so far faded the move. And from a structural perspective, there’s been resistance at prior support, around the 38.2% Fibonacci retracement of the recent sell-off.

That’s an important difference because it highlights waning enthusiasm and it may be showing us that longer-term longs are using this bounce to wiggle out of positions before a perceived steeper fall.

Below 158.08 there’s another swing level at 157.78, after which the 23.6% retracement from that same major move appears at 157.30. And if we see a breach of both levels, a behavioral change will seem more likely as the prior ‘buy the dip’ backdrop is giving way to ‘sell the rip.’

USD/JPY Hourly Chart

Chart prepared by James Stanley; data derived from Tradingview

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