Carry Trade Continues Despite Intervention Talk

Japanese Yen (USD/JPY) Analysis

Japanese Yen in Broad Decline

The Japanese yen is easily an outlier in the FX space as central banks continue to tighten interest rates, regardless of whether they are near or at their respective terminal rates. Interest rate differentials and yield differentials favour the ‘carry trade’ which may continue despite warnings from Japanese officials, expressing their displeasure with undesirable, one-sided FX moves.

This time feels a whole lot different to the latter stages of 2022 where Japanese officials warned of undesirable moves, making specific mention of intra-day yen depreciation of 2-3 yen in USD/JPY. While the yen is depreciating steadily, we haven’t seen the same level of volatility as in 2022. This time, the Japanese economy is showing positive signs of recovery, with the Nikkei index reaching multi-decade highs and inflation trending steadily lower – reducing Tokyo’s urgency to intervene in my view. Nevertheless, threats of intervention are not to be taken lightly as the September and October operations resulted in a significant reversal.

Constructed Japanese Yen Index (USDJPY, AUDJPY, GBPJPY, EURJPY)

Source: TradingView, prepared by Richard Snow

USD/JPY Levels to Consider as One-Sided Trade Has Generally Been Observed

Taking a look at USD/JPY on the daily chart, the pair has steadily risen, exhibiting shallow pullbacks and now reaching levels seen back in September of 2022 when the first round of FX intervention was deployed.

Armed with this information its unsurprising to see some hesitation ahead of 145.00 where prices eased off at the end of last week. Today marks the start of a fresh quarter and the first day of the second half of the year as bulls attempt to engulf Friday’s red candle. Support lies at 142.25, immediate resistance is at 145, with 150 appearing rather far away (for now).

USD/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

Main Risk Events for the Week Ahead

This week sees a return to high impact US data with the FOMC minutes detailing the thinking behind the June decision to skip interest rate hikes and assess the incoming data – although, appearances from Jerome Powell last week where he outlined the Feds thinking may render the statement less impactful.

After an impressive upward revision in US GDP data for Q1, we get further insight into the strength of the US economy via the manufacturing and services PMI prints. Finally, on Friday nonfarm payroll data headlines the week where it is expected that we’ll see further job additions of 225k in the month of June.

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— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX