Synopsis:

ING assesses the recent movements of USD/JPY, predicting potential intervention as the pair approaches historically sensitive levels. With broad dollar strength pushing USD/JPY towards 155, intervention risks increase, reminiscent of previous market actions. Meanwhile, ING forecasts further rate hikes by the Bank of Japan, though doubts persist regarding their efficacy in reversing the yen's trend without broader dollar adjustments.

Key Points:

• USD/JPY Movement and Intervention Risk: USD/JPY has recently surpassed 152 and is approaching 155, a level widely regarded as a threshold for potential FX intervention by Japanese authorities. This follows historical precedents where significant interventions occurred, such as the $70 billion sale in September/October 2022 when the rate was around 150.

• Bank of Japan Monetary Policy: ING anticipates that the Bank of Japan (BoJ) may implement two additional rate hikes this year, likely in July and October. Despite these expected adjustments, bringing the policy rate to 0.50% by year-end, the overall downward trend of the JPY may not reverse unless there is a broad depreciation in the dollar.

• Impact of Geopolitical Risks: The yen's position is further complicated by global geopolitical risks, which can lead to mixed outcomes for the currency. While heavy short positioning in the yen might cause abrupt appreciations during periods of broad market deleveraging, higher energy prices, a typical detriment to the yen due to Japan's reliance on energy imports, continue to pose challenges.

• Market Volatility: The movement toward the intervention zone has already triggered an increase in traded volatility, with 1-month levels climbing back above 9%. This underscores the market's sensitivity to both domestic policy shifts and broader international financial dynamics.

Conclusion:

As USD/JPY approaches levels that historically prompt intervention, and with ING forecasting further rate hikes by the BoJ, market participants should brace for potential volatility and intervention actions. The effectiveness of BoJ policy adjustments in altering the yen's trajectory will likely depend on broader trends in the dollar and international risk sentiment.