By: Michael Boutros, Sr. Technical Strategist
The Japanese yen has been through a violent round trip, falling roughly 5.3% from the yearly high through the last intervention episode, recovering all of it, and then reversing again with a single-day move already exceeding 1.65%. Bank of Japan and Federal Reserve divergence is the reason the currency keeps finding a bid, because Tokyo is edging toward tighter policy while the Federal Reserve holds its attention on inflation rather than growth. Reports of an overnight rate check, the procedural step Japan typically runs before intervening, arrived in the same session as fresh commentary pointing toward a rate hike. Add a weaker than expected ADP employment report on the U.S. side and the two policy paths stop being separate stories and start compounding into one currency move.
Michael Boutros is a StoneX Media Senior Market Analyst with more than 20 years trading foreign exchange, commodities and equity indices across trading desks. He follows currency markets through a structured, multi-time-frame technical approach with a medium-term, event-driven focus, working across the central bank commentary and U.S. data releases that set the tone for the U.S. dollar.
The Bank of Japan is now sending two signals at once, one procedural and one verbal, and both point the Japanese yen in the same direction. The procedural one came overnight, and Boutros describes it plainly, "we've got some reports in overnight trade that the Bank of Japan did a rate check, which is essentially a precursor that they will typically do ahead of another round of intervention". The verbal one came from board member Takada, whose call for policy to stay nimble and data dependent reads as an increase in the odds of a rate hike this month. Consequently, the market is no longer pricing intervention risk and policy risk as separate events, since both now argue for a firmer Japanese yen. "You're seeing things stack up in favor of the yen really taking that move more abruptly", which is why the reaction has been faster than the size of the news alone would suggest.
The Federal Reserve is the other half of this currency pair, and its priorities are pulling U.S. rate expectations in the opposite direction from Tokyo's. After the Jackson Hole commentary, Boutros notes that "the Fed is fixated on the inflationary front", which makes the labor market the variable most likely to disturb the current pricing. Evidence of that disturbance is already visible, with an ADP employment report printing 38,000 against an expectation of 47,000, and fed funds futures easing back from a 68% chance of a hike this month. The nonfarm payrolls release, expected at 58,000 with unemployment holding at 4.1%, is the test that resolves it. As Boutros puts it, "a nonfarm payrolls report tomorrow could be the nail in the coffin that either solidifies this rate hike this month or eases those expectations back".
--- Written by Frédéric Guétin, StoneX Media Producer
--- Expert: Michael Boutros, StoneX Media Senior Market Analyst
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Two central banks are pushing the Japanese yen in the same direction at the same time, with Tokyo edging toward a rate hike while the Federal Reserve holds its focus on inflation. The gap between those two paths, and the U.S. labor data now testing it, is what the currency is actually trading on.
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