USD/JPY Intervention Suspected, Intensifies Dollar Weakness

The dollar is facing heightened weakness amid suspected Japanese intervention in the USD/JPY pair. This speculation intensified following geopolitical tensions that arose last week.

Potential Intervention by Japan

Reports suggest that Japanese officials intervened last Friday as USD/JPY surpassed 159 after a policy meeting by the Bank of Japan. The discussion intensified when the Federal Reserve was said to have queried New York banks about their USD/JPY positions, paralleling a potential “rate check” signaling intervention. The ambiguity surrounding the Fed’s role has sparked speculation about a possible joint intervention with Japan.

Reasons for US Involvement

• The weakening yen has contributed to a rise in Japanese Government Bonds (JGB) yields, impacting US Treasury yields negatively.
• A strong USD/JPY might undermine the efficacy of existing US tariffs on Japan, providing undue advantages to Japanese manufacturers.

The situation is exacerbated by the fact that yen real interest rates remain negative. Additionally, Japan is approaching a snap election on February 8, which could further impact the yen and JGBs.

Implications for the Dollar

Despite these challenges, the dollar’s fundamental outlook hasn’t significantly worsened. Market analysts anticipate that the upcoming Federal Open Market Committee (FOMC) meeting could lend some support to the dollar.

Market Reactions

Traders are now closely monitoring market openings and closings for signs of intervention. An intraday resistance level for USD/JPY has emerged at 155.65. A sustained dollar sell-off will likely require disappointing domestic news from the US.

Impact on DXY

The yen intervention narrative has weighed heavily on the Dollar Index (DXY), with potential interventions in the realm of up to $100 billion reminiscent of Tokyo’s summer sales in 2024. Currently, DXY faces resistance at an upside gap of 97.42, while last year’s lows around 96.20/35 are within reach, contingent upon supportive fundamentals.

As the situation develops, all eyes will be on the forthcoming earnings reports from major US technology firms this Wednesday and Thursday, which could considerably influence market dynamics.