Market update: Japanese yen clobbered to new ’23 lows

_{Article written by David Cottle, DFX Analyst}

Japanese yen weakened against the US dollar, potential intervention watch

As a new trading week commenced on Monday, the Japanese yen continued to weaken against the United States dollar (USD), pushing USD/JPY into a territory reminiscent of past 'intervention' actions by the Bank of Japan in 2022.

USD/JPY reclaims key psychological level, revisits 2022 highs

The currency pair surged above the psychologically significant 145.00 level, reaching a new high for the year at 145.40. The last time this level was surpassed was in September 2022, a period that prompted the Bank of Japan to intervene to counteract yen weakness. The intervention involved direct yen purchases, marking the first instance since 1998.

Market watchers are once again vigilant for any signs of intervention if the pair moves above the 145 threshold, with reports indicating that Bank of Japan intervention could be anticipated within the 145-148 range, according to HSBC.

Dollar strength amid rising Treasury yields and risk aversion

The recent yen weakness is part of a broader trend of dollar strength, fueled by increasing Treasury yields and a sense of general risk aversion in the market. Concerns about the Chinese economy's challenges led to fluctuations in Asian stocks. The Chinese economy's slowdown and deflationary pressures are impacting various sectors, particularly the debt-burdened real estate and construction industries.

News emerged on Monday that property development giant Country Garden suspended trading in eleven of its onshore bonds, sparking speculation about potential debt restructuring. This development led to a 16% drop in Country Garden's shares in Hong Kong.

External Factors Impacting Market Sentiment: Typhoon Lan and BoJ's actions

Additionally, concerns arose about Typhoon Lan, expected to make landfall in Japan on Tuesday, prompting restrictions on air and rail travel.

The Bank of Japan took action on Monday as well, offering unlimited Japanese Government Bonds with residual maturities ranging from five to ten years. This step aligns with the central bank's Yield Curve Control policy.

Upcoming economic data release and BoJ's monetary policy

Tuesday is set to witness the release of official Gross Domestic Product (GDP) figures for Japan's second quarter of the year. A modest increase is projected in the annualized growth rate, anticipated to be 3.1%, surpassing the first quarter's 2.7%. The quarter-on-quarter rate is expected to show a slight uptick to 0.8%.

If the data aligns with expectations, it suggests a gradual economic recovery from the Covid pandemic, albeit at a moderate pace. The Bank of Japan remains cautious and aims to see sustained domestic demand before considering any adjustments to its accommodative monetary policy.

USD/JPY technical analysis

USD/JPY has experienced a renewed bout of strength since late July, but this movement is simply the latest development within a well-respected broad uptrend channel that has been in place since March.

Monday’s trading session witnessed the surpassing of initial resistance at 145.258. However, it remains to be seen whether dollar bulls can maintain a position above this level on a daily closing basis. If they are successful, they will likely encounter additional resistance points stemming from November 2023, which marks the last time the pair reached such elevated levels.

The region at 146.414, which served as a starting point for the dollar's decline on November 9 of the preceding year, now presents itself as a notable resistance zone. Probable support can be anticipated around 143.26, which corresponds to the intraday peak on August 2. Further below, initial Fibonacci retracement support at 141 is expected, providing defense for channel support at 139.202. While these latter two levels are not immediately threatened, a market that is cautious of potential central bank intervention will keep them in consideration.

As the Monday European session draws to a close, the dollar hovers around the psychologically significant level of 145.50. A close above this threshold will likely embolden bullish sentiment, encouraging bulls to attempt further upward movement. However, the broader market may suspect that the dollar is undergoing a bit of overextension, particularly in the short term.

Data pertaining to retail traders indicates that 19.91% of traders are net-long, and the ratio of short-to-long traders stands at 4.02 to 1. This sentiment insight potentially provides indications of the overall market direction.

USD/JPY daily chart

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