The Yen approaches a critical threshold

EUR/JPY

Key zone: 185.00 - 186.00

Buy: 186.30 (against a strong positive fundamental backdrop); target 188.50; StopLoss 185.60

Sell: 185.00 (on a pullback following a retest of 186.00) ; target 183.00-182.50; StopLoss 185.70

The weakening of the Japanese yen to 162 JPY per U.S. dollar is reinforcing expectations of a further decline in the national currency. An increasing number of market participants now view the 165 level as the potential threshold beyond which the Japanese authorities could once again intervene in the foreign exchange market.

At the same time, the BOJ's intervention strategy is gradually evolving. Whereas the market previously focused on specific exchange-rate levels, the likelihood of intervention is now increasingly determined not by the absolute exchange rate itself, but by the speed of the decline and the degree of market dislocation. As investors have adapted to the regulator's previous tactics, the effectiveness of traditional warning signals has noticeably diminished.

Reminder:

In April and May, the Japanese authorities already spent a record ¥11.7 trillion to support the national currency. However, recent experience has shown that interventions provide only temporary relief. That is why the Bank of Japan is now unlikely to intervene at current levels, where the impact of such measures could be limited.

The main fundamental factors putting pressure on the yen remain the high yields on U.S. dollar-denominated assets, persistently elevated U.S. interest rates, and geopolitical tensions that continue to support demand for the U.S. dollar.

• The previous practice of issuing public warnings has almost completely lost its effectiveness. As a result, the Japanese authorities are increasingly relying on strategic ambiguity in an effort to restore the element of surprise.
• Finance Minister Satsuki Katayama once again confirmed the government's readiness to respond to excessive exchange-rate volatility. However, verbal interventions have so far failed to halt the pressure on the yen. The depreciation of the Japanese currency accelerated after Sanae Takaichi came to power in October last year, as well as due to the conflict surrounding Iran, which pushed global oil prices higher and worsened Japan's external trade conditions.
• The Bank of Japan's interest-rate hike came too late. As a result, the future direction of the yen is now largely determined by the strength of the U.S. dollar and expectations of tighter monetary policy by other major central banks.
• If the exchange rate approaches 165 JPY per U.S. dollar, the probability of another currency intervention by Tokyo will increase significantly.
• A substantial buildup of short yen positions could amplify the impact of any intervention. If intervention begins, market participants would be forced to aggressively cover their short positions by buying back the Japanese currency, potentially resulting in a much stronger market move.

Another supporting factor could be coordinated action between the United States and Japan under the joint statement signed in September last year. The upcoming U.S. labor market report could also have a significant impact. Strong employment data may reinforce expectations of further Federal Reserve tightening, strengthen the U.S. dollar, and increase pressure on the Japanese currency.

Historically, Japan has repeatedly taken advantage of periods of lower market liquidity during national holidays to conduct currency interventions, allowing it to achieve a more pronounced market impact.

According to market estimates, the yen could weaken by another 2% during the second quarter. If this forecast proves correct, it would mark the fourth consecutive quarterly decline in the Japanese currency—the longest period of weakness in the past four years. The primary reason remains the persistent interest-rate differential between Japan and the world's other major economies.

What does this mean?

The EUR/JPY currency pair remains in a zone of elevated uncertainty, where two opposing fundamental forces are acting simultaneously: the European Central Bank's hawkish rhetoric and the growing probability of currency intervention by the Japanese authorities.

In the short term, the pair's direction will depend on the outcome of the ECB Forum in Sintra, the release of eurozone inflation data, and, above all, comments from representatives of the Japanese government and the Bank of Japan regarding their willingness to intervene in the foreign exchange market.

So we act wisely and avoid unnecessary risks.

Profits to y’all!