FX.co ★ USD/JPY: Run across a minefield

Despite the risks of currency intervention, the USD/JPY pair persistently moves higher, approaching the 152 figure. Do recall that last year, buyers similarly ignored all warning signals and briskly marched towards the 152.00 mark. However, they didn't reach it. When the price was at 151.96, the Japanese government initiated a massive currency intervention. This move strengthened the yen by several thousand points.

This year, USD/JPY traders have already received a warning: rumors circulated that in early October, Japanese authorities intervened when the pair crossed the 150.00 mark. Subsequently, the country's finance ministry declined to comment on remarks on currency intervention, and said there was no need to elaborate on what factors would determine exchange rates. The finance minister mentioned that his department is "closely monitoring the market."

Last year, the Japanese Ministry of Finance spent more than $42 billion on currency interventions. The ministry intervened twice in the foreign exchange market. The first time was in September 2022 (officially announced). The USD/JPY pair then dropped by several hundred points but almost immediately returned to its previous positions. Moreover, the price started to rise at an active pace and eventually approached the 152 mark. The government's reaction did not take long: on October 21, the finance ministry spent a record amount on interventions (equivalent to $37.2 billion). This decision was not officially announced, but many world media outlets (including Bloomberg) learned the details of this event from their sources. According to insiders, the Japanese government's strategy is not to spend money to support the national currency too often. Instead, the Ministry of Finance chooses the "right moment" when it can have the maximum impact on the market.

It should be noted that the first intervention in 2022 was carried out when the USD/JPY pair approached the boundaries of the 146 figure. After a failed attempt to curb the price increase, buyers got bolder and in just a few weeks, the pair rose by almost 600 points. And when the price set a 32-year high, approaching the boundaries of the 152 figure, Japanese authorities delivered the main blow, sending USD/JPY buyers into a knockout.

In my opinion, this year, events are unfolding according to a similar scenario. Of course, the current fundamental background for USD/JPY is different from last year's – the dollar does not feel as confident and is in a rather vulnerable state. But even a minor strengthening of hawkish expectations regarding the Federal Reserve's future course of actions is reflected in the dynamics of USD/JPY. Moreover, the Bank of Japan still adheres to an ultra-loose monetary policy and regularly denies rumors of a possible abandonment of negative rates. Therefore, buyers of USD/JPY have nowhere to go – the established fundamental background leaves them no choice. Whether they like it or not, they have to run across the "minefield," regardless of the risks of a retaliatory response from Japanese authorities.

However, the risks are growing – the higher the USD/JPY price, the higher the probability of a currency intervention. In particular, currency strategists at ING warn that the pair is close to the "red line," which, in their opinion, runs at the 152.00 level. As soon as traders climb above it, there is an extremely high risk of a currency intervention and at any moment, the Japanese finance ministry could react.

In such conditions, can we still consider long positions? In my opinion – no. The probability of a sharp reversal to the south and a significant decrease in price, at least to the 148.50 level (the upper border of the Kumo cloud on the daily chart), is too high.

However, the technical picture suggests that we can consider long positions. On the daily chart, the price is located at the upper line of the Bollinger Bands indicator (151.80), and also above all lines of the Ichimoku indicator, which demonstrates a bullish "Parade of Lines" signal. If the bulls overcome the resistance level of 151.80, the next target for the upward movement will be the 152.70 mark – the upper line of the Bollinger Bands on the weekly chart.

But despite the fundamental and technical signals suggesting that we consider longs, it is still too risky to buy. In essence, it is a trap that will close unexpectedly and irreversibly. There is no doubt that this will happen. The question now is when it will happen. Considering last year's experience, we can assume that the pair has already approached a dangerous threshold, the overcoming of which will provoke a retaliatory reaction from Japanese authorities.