USD/JPY Daily Chart Analysis – 2024-06-27

On Monday, Japanese authorities issued a verbal warning regarding potential action if the yen’s depreciation became excessive. This warning momentarily caused USD/JPY to dip from 159.94 to 158.75. However, this decline was short-lived as USD/JPY surged to a multi-year high of 160.39 by Wednesday. The market remains understandably cautious given the significant April-May drop from 160.24 to 154.40 following official intervention. The persistent interest rate differentials between the U.S. and Japan present a challenge for the Japanese authorities and the Bank of Japan. Until this gap closes, investors are likely to continue testing Japan’s resolve.

Rumours in the market suggest substantial USD/JPY buy stops are positioned above the previous high of 160.24 from April 29, but today’s price action implies these orders might be set even higher, potentially above 161.00. The key question remains: at what point will Japanese authorities step in to support the yen? While the rise to 160.39 has been orderly, daily technical indicators indicate overbought conditions, suggesting a potential natural pullback. Although Japan might permit the dollar to rise to 170.00, the economic damage would be significant. A sharp further depreciation of the yen from current levels could trigger intervention, making the market wary of pushing too aggressively.

Key Points:

• Carry demand is exerting downward pressure on the yen.
• USD/JPY has reached a fresh multi-decade high of 160.82 following the break above 160.
• Carry demand continues to support a higher USD/JPY as U.S. yields recover.
• Japan’s Finance Minister Kanda has voiced growing concerns over yen weakness.
• Recent statements have increased the risk of potential intervention.
• Despite the heightened risk of intervention, the fundamental advantage remains with the USD due to its carry trade benefit.

Technical Levels:

• Key support levels to monitor are 159.72 (55-hour moving average) and 159.21 (100-hour moving average).

The ongoing fundamental and technical dynamics present a complex situation where Japanese authorities may be compelled to act if the yen weakens significantly, despite the underlying carry trade advantage favouring USD/JPY appreciation.