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The FX Trader: Big JPY rally – finally more than just intervention?
Résumé: A steep JPY rally began Wednesday and followed through on Thursday, with some chance this move could stick as the Bank of Japan looks far more determined to deliver stiffer policy medicine. But there is another key development at work that could support the JPY here. Elsewhere, CAD is sharply higher after the Bank of Canada hawkish hold and sterling is on the move, if modestly.
The latest
The Japanese yen is rallying sharply and it may not be just intervention. A confluence of recent developments this week helped to first weaken the Japanese yen and then strengthen it sharply. Earlier this week, USDJPY challenged above 160.00 for the first time since the late July-early August intervention move to strengthen the yen. The chief driver going into this episode was the usual suspects of spiking oil prices and global bond yields moving sharply higher, driving fears of a Japanese bond market meltdown. But since the beginning of the week we’ve had a very sharp move higher in Japanese short rates to price a more aggressive BoJ rate hike trajectory. The 2-year JGB yield ramped nearly 15 basis points – most of it Tuesday and Wednesday – to above 1.85% at its highest Wednesday and we now have a 25-bp hike fully priced for the September 18 BoJ meeting. This came in part on the optics of US Treasury Secretary Bessent’s arm twisting of the BoJ on the sidelines of the G20 meeting of finance chiefs and central bank heads. And indeed, BoJ Governor Ueda delivered rhetoric supporting a more hawkish outlook. Perhaps more importantly for the ability of the JPY rally to stick, Japan’s largest pension fund, the GPIF, is attracting attention today for having held a meeting on August 21, with an August 31 report suggesting that asset allocation was on the agenda, fueling speculation that the USD 2 trillion fund, the world’s largest, is considering changing its allocation to Japanese bonds after rejecting any changes to its allocation principles as recently as March. Could this story be what also drove an exceptionally strong 30-year JGB auction early today, one that drove the benchmark 30-year yield nearly ten basis points lower just a day after it nearly touched the all-time high?
Bottom line: It’s too early to tell, but the confluence of seeming BoJ determination to deliver rate hikes and the GPIF story and strong demand for the longest dated JGBs suggest there is better support for the yen than around previous rounds of intervention. On the other hand, if we go back to yields continuing to spike everywhere, the JPY strengthening move would face an up-hill struggle again.
Chart focus: USDJPY (1-week Ichimoku)
With this latest move lower in USDJPY, we are already running into interesting technical levels for USDJPY as we have cut through all of the local retracement levels (not shown) and we are nearly at the key 155.00 area that held up the price action intraday on the prior two sell-off rounds. It is worth noting that only one sharp sell-off since well back into 2025 has held for more than three trading days and that one (in February) only lasted another day before all of the backfilling started. So the first test for the pair is one of time – lasting into mid-next week, for example. In terms of levels and technical developments according to Ichimoku analysis principles, we are watching two things here. The last time the key cloud level was broken (the first red circle on the left), there was no “confirmation” from the lagging span level (green line) at the time, as it was above the prior price bars. This time, we are still some distance from the cloud level, but are at the new trend tipping point as the lagging span will cross below the price bars in the days ahead even if we just stay at current levels and will of course break lower if the price action heads lower still. First order of business for bears would be a hold below 155.00 and then an eventual break of the bottom of the cloud, which begins to rise above 150.00 in the weeks ahead.
The RBNZ meeting early Wednesday was read as a dovish hike as the central bank’s commitment to further tightening looked less firm than at prior meetings, sending the next anticipated rate hike further over the horizon. Governor Breman said the timing of a future hike is uncertain – some believe due to November elections and perhaps a RBNZ desire to avoid appearing as any factor in the election outcome. The opposition Labour Party wants to give the RBNZ a dual mandate (maximum employment level as well as inflation stability). The polls suggest a close outcome, with a new third party complicating the picture. AUDNZD has eyed the 13-year highs just below 1.2300 in the wake of the meeting.
The Bank of Canada looked like a hawkish hold as the Governor Macklem seemed more concerned with inflation than the recent sharp drops in the official core measures would seem to warrant, and he was also dismissive of the impact of US tariffs, provided they only continue to be assessed on the “narrow base” of Canadian goods. Canadian short rates jumped some eight basis points after the BoC meeting as the pricing for a hike at the December BoC meeting firmed to around 90%. USDCAD turned tail from 1.3940 Wednesday, in part as the USD was weighed down by likely USDJPY intervention, but most of the subsequent move was on the BoC effect as the pair dropped nearly all the way to 1.3800 today, looking very capped.
Sterling only rates a brief mention, but important to note that EURGBP broke above the clear 0.8580 line in the sand of the last couple of months.
Looking ahead
We’ve got the last bits of key US data to consider this week, including today’s ISM Services for August, but more importantly the US August jobs report. For the latter, the unemployment rate deserves as much attention as the (always heavily revised) non-farm payrolls change data. There has been a misleading drop in the unemployment rate in recent months to 4.1% from a peak of 4.5% in late 2025 that has coincided with a drop in the participation rate by a full percentage point since December. This is likely more of a sign of older workers leaving the workforce and the labor force size therefore shrinking slightly than any sign of jobs growth. And already, in the sluggish payrolls number, we have seen the “low hire, low fire” phrase thrown about for quite a while now. Another 4.1% reading and whatever the print is tomorrow, we need to pair it with the participation rate change (same or lower unemployment rate with a lower participation rate is not positive. On the other hand, a small rise to 4.2% while the Participation Rate increases perhaps 0.2% is not negative.) Negative is a rise in both and positive is a fall in the rate with no fall or better in the participation rate.
Besides the jobs report tomorrow, given Warsh’s strange but on the balance hawkish rhetoric at the Jackson Hole speech and focus on inflation as the primary concern, next Friday’s US August CPI print is the really critical final data point into the September 16 FOMC meeting.
FX Board of G10 and CNH trend evolution and strength.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
Things are a bit dynamic with the scale and speed of this JPY move, but note the white hot momentum readings for the 2-day change in the broader JPY picture. As well, note that there is no “contagion” into CHF as the Swiss National Bank is in no hurry to push back against CHF weakness and has been happy to signal a continuation of its zero-interest rate policy for now. Elsewhere, the NZD was marked sharply lower post-RBNZ and CAD somewhat less sharply marked higher after the BoC meeting.
Table: NEW FX Board Trend Scoreboard for individual pairs. The JPY crosses are all flipping into negative trending mode if this move lower holds – with EURJPY and GBPJPY set to flip negative today assuming the price action doesn’t back up too steeply. Difficult to rate the USDCHF attempt to post a new positive trending signal when both USD and CHF are weak here.