ING flagged heightened intervention risk in USD/JPY after fresh downside volatility that preceded a soft US jobs report, which briefly sent the pair below 161.0. The bank said an initial drop may already have involved FX intervention, and pointed to US holidays today and on Monday as a liquidity drain that can amplify price moves. It also referenced a 2024 pattern in which Japanese authorities have tended to intervene around holidays and to spread operations over multiple days, at times acting after USD-negative catalysts.
Market pricing has also shifted. A sharp fall in USD/JPY one-week risk reversals was cited as evidence that implied odds of near-term intervention have risen. Softer US data was described as supportive for the yen in the near term, but ING said Bank of Japan communication would need to turn more hawkish on rates to avoid a repeat of the USD/JPY rebound seen after the April/May intervention round.
Volatility, Intervention Timing, and Market Positioning
We see that USD/JPY saw some choppy downside movement yesterday, even before the weak June jobs report was released. With the pair having recently touched a multi-decade high of 172.50, we cannot rule out that Japanese authorities have already started to intervene in the market. The US Independence Day holiday today creates thin liquidity, making conditions ideal for intervention to have a greater impact.
Given this environment, we expect a sharp increase in volatility over the coming days. Derivative markets are pricing this in, as one-week USD/JPY risk reversals have plunged to -4.5, signaling a high demand for options that protect against a sudden fall in the currency pair. This suggests that buying short-term JPY calls (or USD/JPY puts) could be a prudent strategy to position for an official move.
Challenges for Sustained Yen Strength
However, we must remember the lessons from the April/May 2024 interventions, where nearly ¥10 trillion was spent only for the yen to weaken again weeks later. The recent US Non-Farm Payrolls data, which came in at just 155,000 against an expected 200,000, helps the yen, but it is not a long-term solution. Without more aggressive communication on interest rate hikes from the Bank of Japan, any intervention-driven rally is likely to fade.
