Two weeks ago, it was panic and fear permeating the headlines as widespread accusations of Yen-tervention pointed to the possibility of a larger episode of carry unwind. With Japanese Yen rates remaining low as the rest of the world recovered, a large carry trade built as investors could get cheap capital out of Japan and invest it elsewhere where rates were higher. The vulnerability at that point was the Japanese currency, which has lost more than 50% against the US Dollar since opening 2021 values, so, logically, investors could or would hedge that part of the trade by selling JPY in the marketplace.
This led to a massive one-sided position in the USD/JPY pair and over the past three-plus years, there’s been multiple episodes of unwind, albeit brief. Each time there’s been a walking back of rate hike threats out of Japan and that’s helped the USD/JPY pair to stay afloat.
So, when we see one day of violence as we did two weeks ago after the BoJ rate decision, questions abound about what caused it. But, realistically, it’s a positioning matter as a heavy imbalance of longs look to close positions before being caught in a reversal that soon turns into a counter-trend drive. As I highlighted the following Monday, given price action, it seemed to be an organic move rather than something pushed by either the Japanese or US government; and in the two weeks since that’s gained even more validity.
The turning point was last week when US Treasury Secretary Scott Bessent directly said that the US did not intervene in the USD/JPY market. The pair began to rally and since then it’s been largely a one-direction move, and the daily chart below highlights that well.
USD/JPY Daily Chart
Chart prepared by James Stanley; data derived from Tradingview
USD/JPY For Next Week
The big driver here is Japanese elections and ‘Sana Mania’ has swept the country and there’s little expectation that the current PM and her LDP party along with their coalition partner will take more than 300 of the 465 seats in the lower house. The two-thirds majority will afford Takaichi to lean on the pro-growth economic policies that she used to win election back in October, which led to a strong rally in USD/JPY.
While inflation is a concern in Japan, rather than tighter policy and higher rates she’s pushed for a suspension of an 8% consumption tax, which has further been reason for Yen bears to push.
The challenge at this point rolls back to the item noted above: Positioning. With so many holding long already there’s both a risk of a fast reversal if anything should go awry, particularly if election results surprise with more votes cast towards the main opposition Centrist Reform Alliance, but there’s also seemingly a fright to sell given how aggressive this trend has been.
So if we do see a breach of the 160.00 handle at some point next week, an episode similar to what showed in July of 2024 is possible, where prices rapidly advance to the point that the Finance Ministry is compelled to finally intervene.
For now – the trend is higher and pullbacks to support, such as we saw at the 155.00 level earlier this week, as I had shared in last Friday’s piece, remain a viable path forward. I’m still tracking next resistance at 157.90 and then 159.46.
Regardless, it still appears as though the USD/JPY pair is doing much of the driving for the larger DXY basket given the importance of that built-in carry trade.
USD/JPY Four-Hour Chart
Chart prepared by James Stanley; data derived from Tradingview
USD
As looked at in the webinar two weeks ago, if you weren’t already short USD establishing exposure with RSI at its most oversold in five years was a challenging time to do so.
That’s since been followed by a snapback move and price this week re-tested a massive Fibonacci level at 97.94. So, if you’re still bearish, there’s now a pullback to work with and a key level back in-play. For USD-bulls, it seems that they’re going to need some lift from USD/JPY strength as that’s been a major component of the DXY rally over the past week.
For USD strength to continue, it seems as though we’ll need to see the rally in USD/JPY continue higher, as well, and given proximity to the 160.00 level there has to remain at least some question as to whether that scenario can come to fruition.
For USD bears, RSI is no longer oversold on the daily and there’s an open door to take the shot.
US Dollar Daily Chart
Chart prepared by James Stanley; data derived from Tradingview
--- written by James Stanley, Senior Market Analyst, Global Macro
