Thin liquidity around the US Independence Day holiday has raised the risk of Japanese yen intervention, with ING noting an initial round may already have occurred. USD/JPY sits just below 161.00 at a more-than-two-week low after softer US jobs data knocked the dollar. Analysts warn the pair is vulnerable to a fast, disorderly move lower.
USD/JPY has become the market's clearest high-alert trade, and thin holiday liquidity is the reason. With US markets closed for Independence Day, ING says liquidity will be thinner today and on Monday, creating an opening for potential Bank of Japan intervention.
Why the intervention window is open now
The pair already saw downside volatility that briefly pushed it below 161.0 before the soft US jobs report, and ING cannot rule out that this initial move was driven by FX intervention. Japanese authorities tend to act around holidays and to spread operations over multiple days, so the risk of a further move stays elevated.
The trigger was a weaker US labour market. A 57k payroll gain was more than offset by 74k of downward revisions to the previous two months, softening the dollar. Yet the report was not weak enough to force a full repricing, and ING sees the dollar index stabilising in the 100.0-101.5 range rather than entering a sustained downtrend. Markets can still hold expectations of at least one Federal Reserve rate hike into the 14 July CPI release.
What the options market is signalling
Traders are already paying up for protection. A sharp decline in one-week risk reversals points to a higher implied probability of imminent intervention, and FXStreet notes yen downside protection has become materially more expensive. According to FXStreet: "USD/JPY has moved from a rate-differential trade into a policy-risk trade."
Price levels in focus
Spot sits just below the 161.00 mark, down over 0.15% on the day at a more-than-two-week low, according to Mitrade. Its technical read places first support at the 200-period EMA near 160.57, followed by the 38.2% Fibonacci retracement near 159.86. A convincing break through those layers should pave the way for an extension of the pair's slide from a four-decade high.
ING believes more hawkish rate communication from the Bank of Japan is still needed to prevent a repeat of the rebound in USD/JPY seen after the April/May intervention round.
Sources: Investing.com, FXStreet, Mitrade
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