Yen: what just happened (and what’s next)?

Of course, the yen has recently appreciated strongly. But there were some unexpected moves yesterday that need explanation, as they could shed light on whether USDJPY bottomed out. There are significant implications for the futures of the yen, and traders need to exercise extreme caution (hint: make sure stops are placed).
The yen has generally weakened because the BOJ did not raise interest rates while other central banks did. The BOJ is unlikely to increase rates in the near future, making the currency ripe for physical trading. On Tuesday, USDJPY jumped after the release of US CPI figures, on speculation of an even stronger decision by the Fed at its next meeting.
After the data, for the rest of the session, the pair rallied higher until hitting 1
.90 and then fell back. This is where currency watchers note that the BOJ conducted a “rate check” and published one more “threshold” statement later in the day. The pair then dropped quite heavily, losing over 180 pips within a few hours.
What is “Exchange rate control”?
What matters is not the check itself, but what the BOJ does before it intervenes in the currency. Basically, the BOJ calls different banks to ask what the exchange rate is. This is perhaps a preparatory step for action, or to warn Japanese banks that action is likely.
That’s why there’s been a reaction, but no major currency movement yet. The fact that this happened as the pair was about to hit the 1
5.00 level partly implies that this is the level at which the Japanese authorities will hold their ground. This does not mean that the market will not exceed it a bit or for short periods of time. In fact, one would expect the market to „check” the Japanese authorities to see if they actually intervened.
What does it mean to intervene?
It has been several decades since the pair last hit similar levels, leading to a reaction from the authorities. In this case, the pair rose to the level of 1
7.00 and there was joint action from the US and Japan.
BOJ led the action, but it was under the direction of the Treasury Department, the „paying” agency for the move. Essentially, the BOJ will buy the yen in the market in huge volumes, enough to push the exchange rate down several thousand pips at once. The move is unannounced and can happen multiple times. The exact idea is to prevent the market from trying to push the pair higher by „burning out” many long positions and threatening to repeat at any time.
This is why if you are trading yen pairs for the next few weeks while USDJPY is still near 1
5.00, then you should make sure your stops are already in place and your portfolio is in place. You are ready for a big and sudden upheaval. currency. However, keep in mind, if the market moves as the BOJ and MOF expect, it is also quite possible that no intervention will occur.

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