As long as oil prices continue to rise and the Bank of Japan refrains from raising interest rates, carry traders are likely to continue selling the yen. Against this backdrop, Japan’s currency interventions are unlikely to be effective or to reverse the prevailing uptrend in the USD/JPY pair. Let’s examine this situation and outline a trading plan.
The article covers the following subjects:
Major Takeaways
- Japan has decided to intervene in the Forex market.
- The Japanese government has enough reserves to do this 30 times over.
- Fundamentally, the yen is weak.
- Long trades on the USD/JPY pair can be opened if the price breaks through 157.65 and 157.85.
Weekly Fundamental Forecast for Yen
Goldman Sachs estimates that Japan’s currency intervention at the end of April amounted to around ¥5 trillion and suggests that the authorities still have the capacity to intervene in the Forex market again. While reserves appear sufficient, the key factor is timing. The Golden Week holiday, reduced liquidity, and the most stretched short positions on the yen since January created a favorable window for action. Whether this intervention proves effective, however, remains an open question.
Based on an analysis of central bank accounts, Bloomberg’s estimates are close to those of Goldman Sachs. The volume of intervention is estimated at ¥5.4 trillion. The average value of Japan’s interventions in the Forex market in 2024 was ¥3.7 trillion. At the same time, the country’s gold and foreign exchange reserves reached $1.2 trillion as of the end of March, of which $161.7 billion is in foreign currency. Japan can afford to flex its muscles. However, is it capable of breaking the upward trend in USD/JPY quotes?
Correlation Between Crude Price and Yen Rate
Source: Bloomberg.
Japan is heavily dependent on energy imports, and prior to the conflict in the Middle East, approximately 90–95% of its oil and gas supplies came from that region. Against this backdrop, the correlation between the yen and Brent is hitting record highs. Given that the probability of the Strait of Hormuz opening has dropped to 40% by the end of June, according to Polymarket data, oil prices are poised to rise, driving the USD/JPY pair higher.
The Bank of Japan could temper bulls by tightening monetary policy, but Kazuo Ueda is in no hurry to raise the overnight rate. The odds of a resumption of the monetary tightening cycle in June continue to fall, which does not help the yen.
Likelihood of BoJ Rate Hike in June
Source: Bloomberg.
If borrowing costs in Japan remain stagnant while US stock indices continue to hit new all-time highs, carry trades will remain attractive. Meanwhile, the yen — which serves as the funding currency in these trades — is left out in the cold.
Officially, Japan’s currency intervention was supposed to scare off carry traders. However, history shows that no matter how much Tokyo has intervened in the Forex market in previous years, the returns on carry trades involving the Mexican peso and the yen have outperformed those from investments in the S&P 500 index. The figures are quite substantial.
Carry Trades and S&P 500 Performance
Source: Bloomberg.
The Japanese government’s success is therefore only temporary. Rising oil prices, the BoJ’s passive stance, and increased demand for carry trades are making the yen vulnerable.
Weekly USDJPY Trading Plan
I have repeatedly noted that the sharp drop in USD/JPY quotes following currency interventions presents an excellent opportunity to buy the pair. Traders who missed this opportunity may open long positions as long as the pair trades above 157.35. A breakout above the resistance levels of 157.65 and 157.85 would provide a buy signal.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDJPY in real time mode
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