The Bank of Japan has greatly scared speculators on the USD/JPY pair. No matter how concerned the US is about currency interventions and no matter what the market says that the fundamentals will force USD/JPY to cimb again, it will be extremely difficult to return to 160. Despite the growth of the US dollar above 154 yen, the bullish sentiment is not strong enough. The external background is to blame for this.

With a colossal government debt of more than 250% of GDP, Japan cannot afford to raise the overnight rate too quickly. Otherwise, the government will have to incur additional debt servicing costs. They have to normalize monetary policy extremely slowly, at the speed of a snail. Moreover, the longer the Bank of Japan maintains interest rates at a low level, the weaker the yen. It has long been known that the dynamics of USD/JPY depend on the yield differential between US Treasuries and Japanese government bonds.

Dynamics of correlation between USD/JPY and yields differential

RBC Capital Markets is guided by the correlations existing in the foreign exchange and debt markets when predicting USD/JPY's return to the 160 mark. Former US Treasury Secretary Lawrence Summers also agrees with the think tank. He believes that the currency interventions of the BoJ and the Japan's finance ministry are doomed to failure. HSBC recalls that success in Forex intervention came when Tokyo and Washington acted hand in hand. Janet Yellen's latest comments indicate dissatisfaction of the US. According to the Treasury Secretary, the US expects that interventions will be rare and require joint consultations.

Japanese Deputy Finance Minister Masato Kanda was even forced to justify himself. He argues that if the foreign exchange market operates properly and does not move in tune to speculators, the government and the central bank will not need to intervene. However, in reality, his remarks are nothing more than an attempt to hide a smug smile from effectively carried out actions. Currency interventions amounting to approximately $59 billion were as successful as in 2022. USD/JPY sank from 160 to 154, and hedge funds were spooked.

Interestingly, just like a year and a half ago, market participants have to thank the Federal Reserve for this. At the end of 2022, the Fed's hints at a slower tightening of monetary policy knocked the guns out of the US dollar bulls, now a similar story has happened. The day before the US nonfarm payrolls were published, Jerome Powell announced the central bank's plans to lower the federal funds rate in response to rising unemployment. A couple of days later it became known that unemployment increased in April. Is it any surprise that bond yields and the USD index are falling?

Technically, on the daily chart of USD/JPY, the bulls' failure to storm fair value at 154.6 was a sign of weakness. As long as the instrument remains below this level and while there is a combination of green and red moving averages, it makes sense to consider selling in the direction of 152.3 and 150.0.