FX Markets Remain Focused On Japan’s Intervention Measures

Chinese stocks opened the week on a strong note, hitting a six-month high on improving sentiment in the property market. A pullback in U.S. bond yields overnight should keep local investors on the lookout for heightened risks, especially as the spirit of Federal Open Market Committee policy later this week is unlikely to exceed market expectations.

FX traders in Asia will be paying particular attention to any signs of Japan intervening in currency markets on Tuesday, following news that Japan intervened in currency markets on Monday. The intervention pushed the yen up from a 34-year low of 160 against the dollar, triggering shock waves of volatility.

Market participants will be closely watching further statements from Japanese officials at this critical time to determine whether this intervention will constitute an ongoing intervention package

The historical trend in FX markets is that the yen’s rebound from intervention will fade and test the resolve of officials, although the recent USD/JPY break above 160 highs may also be a catalyst for Japanese intervention.

If historical patterns repeat themselves, similar to what happened on September 22, 2022, USD/JPY may experience significant volatility over the next few trading days.

However, USD/JPY may eventually stabilize around the 155-157 range, but much will depend on the direction of US Treasury yields.

Keep in mind that this week is packed with major high-risk U.S. events, including a potentially hawkish Federal Reserve and potentially strong upcoming U.S. economic data. These developments could push the U.S. dollar higher this week.

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