Where we are: USD/JPY is currently trading at 156.84, down a massive 2.21% on the day after trading as high as 160.72 earlier. This constitutes the Yen’s largest rally since late 2022. The pair has carved out a wide intraday range, well below yesterday’s close, with traders assessing the risk of intervention after officials issued “final” warnings about excessive Yen weakness.
What’s driving it: Yen strength is being driven by increased intervention risk and a squeeze on crowded short positions. The Bank of Japan held rates steady at their last meeting, but Ueda flagged willingness to hike further, contingent on economic projections. This comes as wage data consolidates the case for one more hike this year. USD strength had been amplified by the large US-JP 10Y yield spread of +187bp, but the increasing risk of intervention is trumping yield considerations in the short-term.
- Net non-commercial JPY positioning is extremely short at -94,460 contracts (0th percentile), increasing the likelihood of a short squeeze.
- Finance Minister Katayama reiterated the government’s readiness to intervene in FX markets to support the Yen, with the market now taking those warnings seriously.
- Tokyo Core CPI, a medium-impact event, is due at 08:30 JST tonight; any surprise upside could further fuel Yen strength.
NY session focus: Traders will be closely watching the 08:30 ET US data dump (Advance GDP, Core PCE, Employment Cost Index) for any indication of a slowdown, which could trigger a further unwinding of USD longs. Key levels to watch include 155.58, the low of the day and 155.00. The squeeze trade is working now, with short JPY positions being unwound aggressively. The at-risk trade is being long USD/JPY at these levels. The pain trade would be a sustained move below 155, forcing even more shorts to cover and potentially triggering actual intervention.