USD/JPY prediction: traders brace for a Japanese yen intervention

The Japanese yen jumped sharply on Thursday as traders braced for a potential intervention by the Bank of Japan (BoJ). The USD/JPY pair retreated to a low of 160.62 from the year-to-date high of 162.84. 

US published weak non-farm payrolls data

The USD/JPY pair retreated after the US published the latest non-farm payrolls (NFP) report. According to the Bureau of Labor Statistics (BLS), the economy created just 57k jobs in June, missing the estimated 114k. It also revised the jobs created in May from 172k to 129k. 

The report showed that the manufacturing sector created just 3k jobs, while the government payrolls fell from 32k in May to 8k in June this year. The only positive thing in the report was the unemployment rate, which improved from 4.3% to 4.2%.

These numbers pushed investors to adjust their Federal Reserve expectations. For example, odds of a Fed hike dropped from 56% to 49% on Polymarket.

The data came a day after Kevin Warsh, the Federal Reserve Chair maintained that the Fed was laser-focused on fighting inflation in the country, which pushed traders to expect a rate hike later this year.

Recent data showed that US inflation remained at an elevated level in June, with the headline Consumer Price Index (CPI) and Personal Consumption Expenditure (PCE) rising to 4.2%. The two numbers have remained above the Fed’s 2.0% target for over five years.

Potential BoJ intervention

The USD/JPY exchange rate also reacted to the rising possibility that the BoJ will intervene after the Japanese crashed to its lowest level in decades.

Data in the options market show that traders are expecting more volatility on the Japanese yen. For example, the one-week dollar-yen risk reversal has become more negative, implying a greater demand for yen call options relative to dollar calls. One-week butterfly spreads have widened, a sign that investors are paying more for protection against outsized moves in either direction.

It is unclear how the BoJ will respond to the weaker yen. It has already hiked interest rates to 1%, the highest level in over two decades. 

Earlier this year, the bank pumped over $73 billion by buying the currency. While the initial reaction was positive, the currency then pulled back and reached its lowest level in years.

Recent data shows that the BoJ has room to hike interest rates. Inflation remains high in Japan’s context, while the economy is doing relatively well, with the services and manufacturing PMIs rising to 52.2 and 50.5, respectively.

USD/JPY technical analysis

USDJPY chart | Source: TradingView

The daily chart shows that the USD/JPY pair pulled back sharply on Thursday, a day after forming a doji candlestick pattern. A doji is made up of a tiny body and upper and lower shadows.

It also retreated after retesting the upper side of the ascending channel. At the same time, the two lines of the Percentage Price Oscillator (PPO) and the Relative Strength Index (RSI) have pulled back.

Therefore, the pair will likely continue falling as traders wait for an intervention. If this happens, the next level to watch will be 158, the lowest side of the ascending channel.