The USD/JPY rally continues, driven by speculation of snap elections and political risk premiums in Japan. Japan-China diplomatic tensions also contribute to the rising momentum. Intervention fears may slow the rally near 160, but the pair is expected to ultimately test this level, recalling July 2024’s similar scenario.
In July 2024, USD/JPY was allowed to rise above 160 before intervention was considered at nearly touching 162. July 11, 2024, saw a 1.8% movement due to intervention. At that time, CFTC net non-commercial yen positions were -52% of open interest, whereas they are now 3% net-long, despite differing spot action indications.
Past Interventions Show Temporary Effects
Past interventions showed temporary effects without sustainable recovery. In 2024, a long-term drop followed, due to US 2-year swap rates collapsing by 50 basis points. Presently, such a scenario seems unlikely, and with the risk of snap elections, markets hesitate to anticipate any BoJ hike before summer.
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The rally in USD/JPY shows no signs of stopping as we head into late January. Talk of snap elections in Japan is getting louder, creating political uncertainty that weakens the yen. Recent polls showing the Prime Minister’s approval rating has dropped to a new low of 21% only add to the market’s belief that a political shake-up is coming.
Market Anticipations and Trading Strategies
We believe the market will push to test the 160.00 level, and possibly higher, in the coming weeks. Looking back to the summer of 2024, Japanese officials let the pair move past 160 before intervening near 162. Given the pair is already trading near 158.50, traders should be prepared for a similar playbook this time around.
Buying call options on USD/JPY looks like a sensible strategy to ride this momentum with a defined risk. One-month implied volatility has already jumped to 11.2%, reflecting the growing anticipation of a sharp move through the 160 level. This setup also makes long volatility strategies, like straddles, appealing for those expecting a large price swing, regardless of direction.
We would be cautious about betting on a reversal driven solely by Bank of Japan intervention. As we saw in 2024, a sustained drop required a major fall in US yields, and that is not the current outlook. With the CME FedWatch tool showing almost no chance of a US rate cut before summer, any intervention-led dip in USD/JPY is more likely a buying opportunity than a new trend.
