- The yen got a boost from late-July's coordinated intervention and rising Bank of Japan rate-hike expectations amid firmer Japanese inflation data
- Falling US yield differentials are now a bigger draw for USD/JPY spot pricing than the typical energy trade deficit drivers
- If the pair's going to retest 160.00, it'll need a clear break above 159.50. Otherwise, concerns over intervention could push it lower
The US dollar fell sharply against the Japanese yen in July, with the USD/JPY pair down over 3% for the month. This downward trend continued in recent sessions, as USD/JPY dropped another 0.6% to around 158.40.
Investors are now watching to see if the yen’s recent climb is a fundamental, long-term shift or just a short-term market adjustment.
Why Is the Yen Gaining Despite Elevated Oil Price?
Typically, rising oil prices hurt the yen. Japan imports most of its energy, so higher crude oil costs usually widen its trade deficit and negatively affect its terms of trade, putting downward pressure on the currency.
We saw this play out in late July. When oil prices and Treasury yields rose, USD/JPY hit a new 40-year high, over 163. Even with its typical safe-haven appeal, the yen didn’t get a boost then because Japan relies so much on imported energy.
Japanese authorities stepped in with coordinated intervention and official warnings in late July. This pulled the USD/JPY pair back from its 163.00 peak, pushing it toward 155.00 and setting a strong resistance level.
Right now, people expect the US Federal Reserve to cut interest rates, which is generally weakening the dollar. At the same time, ongoing domestic inflation in Japan has market players predicting more interest rate hikes from the Bank of Japan (BoJ). This is closing the long-standing gap in interest rates between the two nations.
Can USD/JPY Retest 160.00 in the Near-Term?
The 160 level is a psychological threshold, one that could trigger further intervention. The pair recovered roughly half of its decline after the late-July intervention and now trades just under this mark. If the pair breaks decisively above 160, it might head back to the 163-164 range seen before the intervention.
However, several factors may limit the likelihood of a rapid retest of 160. These include the BoJ’s move toward tighter monetary policy, Middle East geopolitical risk, the ongoing risk of official intervention, and how much it currently costs to short the yen
Short-term forecasts from several major financial institutions suggest range-bound trading, with the yen perhaps gaining modestly, heading toward 156-157 if downward momentum continues.
A sustained move back above 160 remains a possibility if US Treasury yields increase and oil prices remain high. However, Japanese authorities have made it clear they’re prepared to step in if the exchange rate approaches levels we haven’t seen in decades.
Morgan Stanley Research’s technical analysis indicates lasting dollar strength against the yen would likely require higher US yields or a less hawkish Bank of Japan. Unless the USD/JPY pair breaks clearly above 159.50, rallies toward 160.00 will probably hit fresh intervention concerns and prompt profit-taking.
Coordinated US-Japanese intervention, along with growing expectations of more Bank of Japan rate hikes, helped the yen bounce back
Japan imports nearly all its energy. So, higher crude costs widen the trade deficit, which then pushes the currency down.
It’s still possible if US yields strengthen. But intervention risks and the Bank of Japan’s tightening bias are now stopping a lasting break above that level.