Japanese Yen Intervention: Has the Big Move Only Just Begun?

The Japanese yen is once again at the center of attention in the foreign exchange market following the latest intervention aimed at stopping its sharp depreciation.

After a prolonged period of yen weakness and significant gains across JPY currency pairs, the authorities decided to act. This time, Japan did not act alone. The United States and Japan cooperated in a coordinated and unusual intervention in the foreign exchange market aimed at supporting the Japanese currency.

The initial market reaction was sharp. USDJPY, which had reached extreme levels following a prolonged period of appreciation, fell rapidly after the intervention and at one point reached the 155 area.

Since then, however, we have seen a significant correction to the upside, with USDJPY now trading back around the 159 area.

In my opinion, it is precisely this return to current levels that makes the situation particularly interesting.

I believe the latest move higher is primarily a correction following the sharp decline caused by the intervention, and that the next significant move in USDJPY will once again be to the downside.

Has the Latest Intervention Really Ended?

Intervention in the foreign exchange market can cause an extremely sharp move within a very short period of time, but the initial reaction does not necessarily represent the end of the move.

Following the rapid and significant decline in USDJPY, traders who were holding short positions and accumulated substantial profits may naturally begin taking some of those profits.

When a trader closes a short position in USDJPY, the trader effectively performs the opposite transaction and buys the pair back. When many traders do this following a sharp decline, profit-taking itself can create temporary demand and contribute to an upward correction.

In my opinion, this is a significant part of what we are currently seeing.

From my perspective, USDJPY returning to the 159 area does not necessarily indicate that the market has reversed the effects of the intervention or that the previous upward trend is about to resume.

On the contrary, I primarily view the current rise as a correction following a sharp and rapid move lower.

Does Cooperation Between the United States and Japan Change the Rules of the Game?

There is also an important political and macroeconomic element that should not be ignored.

The latest intervention was not a unilateral action by Japan. This time, the United States joined Japan in a coordinated effort to support the Japanese yen, an extremely unusual event in the foreign exchange market.

In my view, the cooperation between the two countries is also highly significant when looking ahead.

I find it difficult to believe that the United States and Japan would enter the market together in such an unusual move, cause a sharp decline in USDJPY, and then shortly afterward simply stand aside and watch the market erase the entire decline, return to the intervention area and eventually break to a new high.

Of course, anything can happen in the market, but that is not the primary scenario I see at the moment.

In my opinion, the fact that the price has corrected back upward does not mean that the intervention failed or that the move has ended.

If USDJPY continues back toward 160 and above, pressure on the Japanese authorities is likely to return. And this time, the market knows something else: Japan is not necessarily acting alone, and the United States has already demonstrated its willingness to participate.

For this reason, I find it difficult to view a scenario in which USDJPY simply returns to its highs and continues rising as if nothing happened as the most likely scenario.

Is USDJPY About to Resume Its Decline From Here?

In my opinion, yes.

Looking at the monthly chart, USDJPY is once again trading in a highly significant price area.

Following the intervention and the sharp decline that came with it, the price has corrected a substantial portion of the move and has now returned to an area from which, in my opinion, the next wave lower could begin.

USDJPY Monthly Chart

The monthly chart illustrates the picture I currently see very clearly.

Following a prolonged upward trend, the price once again reached an extreme area. A sharp decline followed, and we are now seeing an upward correction.

From my perspective, this correction does not change my primary target.

My expectation is that USDJPY will resume its decline, break back below the 155 area and eventually move below the psychologically important 150 level.

Does the Gap Around 148 Still Need to Be Closed?

In my opinion, yes.

One of the primary targets I continue to follow in USDJPY is around 148, where a significant gap remains open.

Despite the intervention, the sharp decline and the subsequent correction back upward, my view regarding this gap has not changed.

I still believe that USDJPY will eventually return to this area and close the gap.

On the way there, 150 is obviously an important psychological and technical level, which is why I view it as a significant milestone along the way.

However, in my opinion, 150 is not necessarily the final target.

The scenario I expect is a resumption of the decline from around current levels, a move back below 155, a continuation toward 150 and eventually the closing of the gap around 148.

This is not intended to be a neutral forecast.

My view is that USDJPY will continue to decline and that the gap around 148 will eventually be closed.

Is GBPJPY Telling Us a Similar Story?

USDJPY is not the only currency pair presenting an interesting picture in my opinion.

The GBPJPY monthly chart also shows a very long and powerful upward trend, which has taken the pair from around 180 to above 215.

GBPJPY Monthly Chart

However, the price is now trading near the upper boundary of the long-term channel highlighted on the chart.

After a prolonged period in which the yen weakened almost continuously against major currencies, a meaningful change in the direction of the Japanese currency could naturally have a significant impact on GBPJPY as well.

If my expectation of renewed yen strength proves correct, I believe GBPJPY could also experience a significant correction to the downside.

The first target I have marked on the chart is around 205.

Could USDJPY’s Return Toward 160 Actually Increase the Probability of Another Move?

In my opinion, this is one of the most important points right now.

The authorities have already demonstrated that they are not indifferent to extreme weakness in the Japanese yen.

Despite the intervention and the sharp decline that followed, the market has managed within a relatively short period of time to push USDJPY back toward the area where pressure on the authorities becomes increasingly significant.

Therefore, as the price approaches 160 and potentially moves above it again, the market is dealing with more than technical analysis alone.

The possibility of stronger statements from the authorities, renewed warnings of intervention or even additional action in the foreign exchange market becomes relevant again.

From my perspective, the combination of the technical picture and the cooperation we have already seen between Japan and the United States makes the current area particularly interesting.

If the market attempts to push USDJPY back toward a new high, it will be very interesting to see how the two countries respond.

So Where Do I Believe the Japanese Yen Goes From Here?

My view is clear: I expect renewed strength in the Japanese yen and a decline in USDJPY from around current levels.

The correction that followed the intervention does not change the broader picture for me.

Following such a sharp decline, it is natural to see profit-taking by traders holding short positions and a corrective move in the opposite direction.

However, in my opinion, the main move to the downside is not yet over.

The fact that the United States and Japan have already cooperated in a significant intervention only strengthens my view that it is difficult to imagine them simply allowing the market to erase the entire move and return to new highs without a response.

In USDJPY, I continue to view 150 as an important target along the way and the 148 area as my primary target, where I expect the gap to be closed.

In GBPJPY, the 205 area is the first target I am watching in the event of renewed strength in the Japanese yen.

The market will, of course, ultimately determine what happens. But based on the technical and fundamental picture I currently see, my expectation is that the next significant move in USDJPY will be to the downside and that the gap around 148 is still waiting to be closed.

Disclaimer

Trading in financial markets involves significant risk and may result in the partial or complete loss of capital. This article reflects the personal opinion of the author only and does not constitute investment advice, a recommendation to enter into any transaction, or a substitute for professional advice that takes into account an individual’s personal circumstances and needs.

The author may hold, directly or indirectly, positions in the assets or financial instruments mentioned in this article. The reader’s individual considerations, objectives, financial situation and appropriate level of risk have not been taken into account.