NFP Looms as USD/JPY and AUD/JPY Test Key Resistance Levels
Japanese Yen Drifts Lower, Recoups Post-Intervention Losses
It has been five weeks since the MOF first intervened, sending USD/JPY more than 500 pips lower. A second shot was fired just four days later, although it only generated a 300-pip decline. Even so, volatility has been significantly lower since then, allowing the Japanese yen to drift weaker and USD/JPY to recover much of its intervention-related losses.
That, of course, begs the question of whether we will see another round of intervention. Perhaps volatility has remained subdued enough to keep the MOF at bay, given that volatility is supposedly what officials are monitoring. However, most agree that the absolute exchange rate level also matters. With 160 widely rumoured to be ‘the level’, and the MOF pulling the trigger the day after USD/JPY closed decisively above it, traders are right to remain wary of another bout of yen strength.
View related analysis:
- Japanese Yen Intervention: Volatility Fades, But Turning Points Emerge
- FX Futures Positioning: US Dollar Bulls Return, Yen Bears Tease MOF
- US Dollar Outlook: USD Bulls Flex into NFP, AUD and NZD Slide
- Gold Outlook: Bulls Eye Rebound, Though Futures Exposure Remains Weak
- Euro Technical Analysis: EUR/USD, EUR/JPY, EUR/AUD
NFP a Fly in the Ointment for MOF
The fly in the ointment is, of course, NFP. The report has surprised to the upside over the past two months despite well-founded concerns surrounding the Middle East and inflationary pressures. With ISM surveys improving and only a marginal rise in the prices paid component of the services PMI, job growth could continue to support the Fed's higher-for-longer narrative and even reignite discussion around rate hikes.
That would provide a bullish catalyst for USD/JPY heading into the weekend and increase the risk of MOF intervention should gains extend further. Conversely, a downside surprise could embolden US dollar bears as traders scale back expectations for higher rates and reassess the Fed's policy path.
For me, it is simply a question of whether USD/JPY rises a little further before the MOF steps in and sends the pair sharply lower, or whether traders do the work themselves following a weaker-than-expected NFP report. Either way, I remain on the lookout for a decline in USD/JPY.
USD/JPY Technical Analysis: US Dollar vs Japanese Yen
Yen Volatility Returns as USD/JPY Tests 160
The daily chart shows that USD/JPY has risen 506 pips (3.3%) since its May low, although it has taken 20 days to do so. The high-to-low range indicator highlights just how subdued volatility has been, with daily ranges remaining well below their 20-day average until yesterday. Open-to-close ranges have also remained near their averages as the dust from intervention settles.
However, market-driven volatility is beginning to pick up, likely as USD/JPY tests the 160 level and traders effectively do the work of the MOF for them. A hammer candle formed on Wednesday, which was also an outside day, following a sharp selloff and subsequent reversal after 160 was tapped. A similar pattern emerged on Thursday, when USD/JPY suddenly sold off late in the session as traders either booked profits or took a punt on a short position, before prices reversed back towards 160. USD/JPY is now hugging that level once more.
History Suggests Intervention Could Spark a Deeper Pullback
As a reminder, previous interventions have resulted in USD/JPY tops that lasted anywhere from several weeks to several months. The smallest post-intervention decline was 5.1%, which would place USD/JPY near 152.52 if history repeats. However, some intervention-led selloffs have extended into double-digit percentage declines. Peace in the Middle East, combined with BOJ rate hikes and another round of MOF intervention, would provide a potent combination for USD/JPY bears. For now, however, I suspect we may need to see another burst of volatility before the bears get their say.
Source: ICE, TradingView
AUD/JPY Technical Analysis: Australian Dollar vs Japanese Yen
Volatility has increased on AUD/JPY, once again suggesting that a top could be forming. The RBA hinted that rate hikes may be over, while the case for yen strength continues to build. From a technical perspective, AUD/JPY has repeatedly struggled around 114.70 since May, and with a notably bearish candle forming on Tuesday, my bias is for bears to fade rallies into that level.
With a potential monetary policy divergence on the cards, AUD/JPY may be close to a top—if it has not formed one already.
Note the May VPOC at 113.48, which could provide an interim target for bears. A break beneath that level brings 113.00 and 112.00 into focus.
Source: ICE, TradingView
View the full economic calendar-- Written by Matt Simpson
Follow Matt on Twitter @cLeverEdge
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