USD/JPY Weekly Outlook: BOJ Intervention Shadow Looms Into NFP

• Holiday-thinned markets leave liquidity low, lifting volatility risks
• Intervention threat hangs over the pair with risk of repeat action
• Heavy US macro calendar builds into nonfarm payrolls as the key event risk
• Intervention effectiveness hinges on how US rate expectations shift
• 100DMA a key topside level that has already drawn verbal intervention

Summary

We’ve entered a new regime where the threat of intervention is dominating USD/JPY, not movements in energy prices, with extended holidays in Japan, thin liquidity, and a heavy slate of US data all colliding to leave the potential for significant volatility. With nonfarm payrolls data out Friday, the near-term effectiveness of suspected intervention by the Bank of Japan (BOJ) will be put to the test.

Intervention reshapes price action

While doubts about its effectiveness over the medium to longer term remain, it’s undeniable suspected intervention from the BOJ to support the yen last Thursday, along with follow-up verbal intervention on Friday, has shifted directional risks for the pair in the week ahead.

Even though fundamentals such as negative real interest rates, Japan’s massive public debt burden and concerns about the nation’s fiscal outlook given the threat posed by stagflation as a result of the Iran war, which has kept pressure on both the yen and Japanese bonds, it has created an almighty deterrent to push the pair back towards the levels seen early last week.

As such, we may see something akin to a stalemate in the days ahead as traders test the boundaries of what Japan’s Ministry of Finance (MoF) deems acceptable price action.

Low liquidity, high volatility?

With Japanese markets closed for the first three days of the week, and Chinese markets also offline Monday and Tuesday, market liquidity will be as thin as tissue paper in Asia, creating an environment where even modest order sizes could lead to outsized moves.

It looms as a tempting window not only for the MoF to wade back in, but also for larger market participants who will know they will likely get more bang for their buck than in normal conditions.

Throw in headline risk related to the Iran war, which has often been seen in early Asian trade on Mondays, and the recipe is there for some serious market swings.

It doesn’t mean it will happen, but the ingredients are in place.

Source: TradingView

What is clear is the suspected intervention episode has been highly influential on the performance of the US dollar more broadly, as seen in the chart above tracking USD/JPY in black against the US dollar index (DXY) in blue.

That suggests that even if you don’t trade dollar yen directly, you’ll still have to keep an eye on the pair given the implications not only for other currencies, but also other asset classes given dollar movements can often influence broader sentiment.

US data to test intervention effectiveness

While intervention and headline risk will dominate the early parts of the week, the back-end may see fundamental forces return to the fore with a crescendo of major economic data in the States leading up to nonfarm payrolls on Friday.

As seen during past intervention episodes from the MoF, the effectiveness of the move is really dependent on the US interest rate outlook given the enormous yield advantage the US enjoys over Japan. As such, this week looms as particularly important.

Strong data that reinforces the chasm in yield differentials could easily see USD/JPY trade right back towards where it was last week. But weak data could do some serious downside damage, especially if accompanied by additional intervention.

Source: TradingView

Currently, the Fed funds futures curve has the FOMC holding rates steady over the remainder of the year with only two basis points of easing priced, as seen in the chart above.

Looking at the calendar below where times are shown for the US east coast, while the cadence of releases is steady, there’s only a handful that really matter for the US rates outlook.

Source: TradingView

As is the case every month, the payrolls report for April tops the list with markets looking for an increase of 73,000, down from 178,000 in March. The payrolls figure is a lottery at the best of times, but it has had a knack of topping forecasts in recent years, often accompanied by downward revisions to prior data.

Despite being incredibly flaky in terms of firm economic signal, which is why I always note the unemployment rate is more consistent, the payrolls number remains the one markets like to react to. If the message aligns with that from the unemployment rate, it can often lead to powerful one-sided moves, whereas mixed messaging can see markets churn like an angry sea in a storm.

Before payrolls rocks the proverbial boat, we’ll receive a steady stream of secondary labour market indicators, including JOLTS data for March, along with ADP private sector hiring and Challenger layoffs for April, along with weekly jobless claims. Recent data on the labour market has firmed, so keep that in mind when assessing the data as it prints.

The only other report worth mentioning is the ISM services PMI out Tuesday. While individual components can be volatile at the best of times, providing plenty of fodder for narrative spinning, what really matters now is inflation, so keep a close eye on the prices paid measure.

The separate manufacturing PMI prices measure surged to four-year highs in April, with over 80% of respondents indicating rising prices. If that’s replicated in the far larger services sector, which should really be spared from the initial impacts of higher energy prices, it will only fuel the belief that directional risks for the Fed funds rate may be skewing higher rather than lower.

While there are plenty of Fed speakers doing the rounds, the only ones that really matter are those who come after the payrolls report, unless we see a major peace breakthrough in the Gulf.

While the Q3 Treasury refunding announcement is scheduled, which on occasion can generate volatility, it is expected to show a continued preference for issuing new debt for shorter durations, not longer given elevated borrowing costs. Until markets start caring about the US fiscal position again, this event screens as noteworthy rather than important .

While the Japanese calendar is light, wages data out Friday is important for the BoJ outlook, with strength likely required to bolster June rate hike bets following a raft of weak inflation data from Tokyo last Friday.

Key levels to watch

Source: TradingView

In this environment, where thin liquidity, intervention risk and major economic data collide, technical signals look secondary and are more likely to be overridden by flows and headlines.

Overhead, the zone I’m watching runs from the 100-day moving average up to 157.52, the bottom of the former sideways range the pair had been bouncing around within for two months prior to Thursday’s breakdown. It’s notable that’s where the price stalled on Friday, and where verbal intervention was once again unleashed. If the price can get a foothold above that resistance zone, it may encourage additional bulls to test the resolve of the MoF to continue fighting fundamentals.

Beneath where the price now sits, we’ve now seen two bounces from support at 155.64, making that the first downside level to watch. A sustained break beneath there would make it interesting, putting the Liberation Day low trendline and 200-day moving average on the radar. Should the US data whiff unexpectedly, an intervention-led probe beneath both levels would raise serious questions about the sustainability of the bullish trend.