The USD/JPY has transitioned from a straightforward carry trade to a complex political landscape. The pair experienced a reversal exceeding 300 pips, moving from the peak of 159.22 down to approximately 156.18–156.40 within a single trading session. Selling intensified following reports that Japan’s Ministry of Finance conducted a “rate check”, reaching out to banks for real-time yen prices. This type of action is performative, yet it carries an implicit warning: “we’re monitoring and prepared.” The decline occurred despite the absence of a typical panic spike or flash-crash scenario. Price action appeared to indicate that stops were triggered, with consistent and substantial offers in USD/JPY, yet no significant orders were observed. Simultaneously, the US dollar experienced significant selling pressure across various markets, amplifying the movement of the yen. Gold advanced towards $5,000, silver broke through triple digits, and the dollar index fell to approximately 98.76, marking its lowest point since early October. This situation has evolved beyond a straightforward “Fed minus BoJ yield” trade; it is now influenced by political factors and driven by headlines.
The Bank of Japan maintained the policy rate at 0.75%, with an 8–1 vote in favor. One board member, Takata, explicitly expressed a desire for an increase to 1.00%, indicating a distinct tightening bias. The Bank of Japan’s perspective continues to reflect expectations of moderate growth, with underlying inflation anticipated to strengthen later in the year. They emphasized that real rates are currently “significantly low” and that, should the outlook materialize, rates will continue to increase. That establishes a gradual yet steady normalization trajectory in the context of USD/JPY. Officials are keenly aware of the need to avoid stifling the recovery with steep rate increases just ahead of the lower-house election in early February. The political motivation appears to focus on stabilizing the yen through foreign exchange tools and signaling, rather than implementing significant interest rate increases. Employing rate checks and intervention threats enables Tokyo to demonstrate responsiveness to the cost-of-living pressures while maintaining stability in the JGB market. For USD/JPY, this indicates that as the pair rises, there will be increased political resistance, despite the Bank of Japan’s ongoing accommodative policy.
While yen headlines were the primary focus of the intraday movement, the situation on the dollar side is also showing signs of decline. The dollar index is currently positioned at 98.76, marking a four-month low, as market participants express doubts regarding policy credibility. Markets anticipate the Fed will maintain the funds rate within the 3.50%–3.75% range during the January 27–28 meeting. Futures continue to reflect approximately 44.5 basis points of anticipated cuts throughout the year, an increase from the roughly 41 basis points noted prior to the recent leadership discussions. The ongoing discussion regarding the next Federal Reserve chair introduces an additional risk factor for USD/JPY. Prediction markets have experienced a significant shift in favor of Rick Rieder, with implied odds approaching 46%, compared to approximately 32% for Kevin Warsh. Rieder is perceived as supportive of the market and more prompt in alleviating stress, leading investors to view this as slightly more dovish throughout the cycle. Combine that with Donald Trump’s tariff threats – including discussions of a 100% tariff on Canada if it finalizes a deal with China – and you encounter increased policy noise. The erosion of confidence in the dollar’s policy anchor is driven by concerns surrounding protectionist trade policies and the independence of the Federal Reserve. The dollar component of USD/JPY is currently encountering diminished rate expectations, alongside political volatility and concerns regarding credibility simultaneously.
Throughout the majority of the previous quarter, USD/JPY mirrored the pattern of Japan’s 2s10s curve, exhibiting a correlation of approximately 0.82. As the curve steepened on reflation hopes and fiscal plans, the pair advanced, transforming it into a primarily Japan-driven narrative. In recent weeks, there has been a significant decline in that short-term correlation. Fluctuations in USD/JPY are no longer aligning neatly with shifts in the local curve. Simultaneously, the correlations with US risk indicators such as S&P 500 futures and the VIX have stayed near zero. The recent fluctuations were not clarified by the US-Japan yield spreads or the outright US yields. The message indicates that the risk of political intervention and the signaling of foreign exchange policy are currently the primary influences in the market. For traders, this indicates that models based on yield differentials and risk sentiment are not fully accounting for the actual drivers at play.
The pair breached horizontal supports at 157.50 and 157.00, effectively terminating an uptrend that had persisted for several months. The asset has also dipped below the ascending 50-day moving average on the daily chart, transforming a crucial trend indicator from support to resistance. Selling only paused when USD/JPY hit the 155.75 area, a point that served as a launchpad multiple times in the latter part of the previous year. Minor support is positioned around 155.30, while more significant historical demand zones are identified at 154.45, 153.63, and 153.00. If intervention headlines escalate, those “technical” levels may lose significance during a direct move, yet they retain importance once the noise subsides. Indicators validate the transition. The daily RSI has fallen below 50 and is trending downward, indicating that momentum currently leans towards the downside while not being in an oversold condition. The MACD has crossed below its signal line, resulting in a negative histogram, although the indicator is still slightly above zero. On the weekly chart, a previous shooting star candle has now been succeeded by a complete evening-star reversal pattern. The current combination indicates a potential for additional downside risk in USD/JPY, unless policymakers take clear measures to avoid escalation.