USD/JPY Buyers Continue to Bid Support – but Can They Force a Breakout?

USD/JPY Talking Points:

• While USD/JPY was the big deal from July through September, more recently it’s the meltdown in the Euro, driven by the moves in sovereign bond markets that’s started to get more attention.
• While USD is at a fresh yearly high, USD/JPY is still well below it’s yearly high and since the early-September swipe, the pair hasn’t yet re-tested the 160.00 handle.

It’s been a slow climb-higher in USD/JPY over the past three weeks and from the weekly chart, there remains a tonality shift ever since the dual intervention in late-July. So, it would be far too early to assume that the threat of sell-offs and unwind is completely gone and as the pair re-approaches the 160.00 handle, the very real question is whether or not policymakers will want to burn the dry powder to defend a lower-high.

At this point, US Treasury Secretary Scott Bessent’s gambit hasn’t really paid off. The comment when he said ‘I am the house,’ and daring markets to ‘bet against me if you want’ appeared very near the current low around the 153 handle. Since then, buyers have clawed back another 400-plus pips and each pullback has been bid.

The problem is one of resources, as US Treasury yields continue to spike the Treasury Secretary has his hands full elsewhere. The increased bond buybacks, while delivering a short dose of pullback in yields, are small compared to the issuance that’s due in the coming months. It simply hasn’t been enough to inspire market participants to want to hold bonds with the idea that the Treasury department will be able to arrest the climb in yields.

What ultimately could do that – the Fed – and another bond buying round, seems highly improbable with inflation where it’s at.

On the side of Japan, they have their own concern with inflation and their bond yields have been climbing, as well, just not to the same degree as what’s shown in the UST market. Ideally Japan would probably want a lower spot rate in USD/JPY but an actual intervention requires capital, which, traditionally, means selling Treasuries. That additional supply would mean lower prices and higher yields and this explains why Scott Bessent became so concerned with the matter in the first place.

So, there is a conundrum of sorts, and the consequences could be massive. We can see trepidation in the USD/JPY market as buyers have pulled back from fresh highs and the inflection points of the intervention two months ago at 164 and then the pointed intervention comments at 160.00 have remained untested.

Two weeks ago, following the Bank of Japan’s rate hike when the BoJ failed to provide any timing on their next move, USD/JPY broke out and ran up to 159.00. This, again, elicted comments regarding intervention that helped prices to pullback. But, just as I had looked at around the time, this was still a ‘buy the dip’ setup for bulls as the fundamental bias remained decisively-tilted to the long side of the pair.

USD/JPY Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/JPY Support

The 156.69-157.22 zone is a familiar one, and it was tested for support for six consecutive days through last week’s close. The underside wicks on the above daily chart show how well that zone was defended by buyers during pullbacks, and that sets up for a higher-low.

The next challenge is the prospect of a higher-high. The last time the pair was at 159.00, it got some pointed comments from policymakers. And I think they were looking around the next corner, and trying to get in the headlines before a 160 print, which I expect to be a more important line-in-the-sand, at this point.

But, for now, I’d be cautious in looking for breakouts beyond 159.00 and, instead, look to factor resistance targets around the premise of that level providing at least a pause for upside rallies. This would also mean that a pullback could be a more ideal way to address the matter, rather than chasing when price is so close to that line-in-the-sand.

From the four-hour chart below, I’ve added the 157.50 psychological level, and the 157.22 level would still be viable as a higher-low, above the swing low from last Thursday.

USD/JPY Four-Hour Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Market Analyst, Global Macro