Tokyo bought the Japanese Yen a range, not a trend

On August 25, the US dollar-to-Japanese yen (USD/JPY) exchange rate hovered just above 159.00, maintaining a gain of less than a tenth of a percent. Over a session that saw fluctuations of 44 pips, ranging from a low near 159.00 to a high just below 159.50, the currency pair currently sits just beneath the midpoint of that range.

This outcome is unusual, as a successful defense typically involves maintaining a level rather than a retracement schedule. The Ministry of Finance had sold approximately 8.45 trillion yen in a single session earlier in July, and an additional 5.3 trillion yen in coordination with the US Treasury, driving the exchange rate from just below 164.00 to a low around 155.00.

However, nearly half of this retreat has been regained, and it occurred without any new headlines supporting the yen. The intervention essentially secured a ceiling, and the market has respected this level for three weeks. The 159.50 area has served as a barrier for every upward attempt since the beginning of August, and the 50-day Exponential Moving Average (EMA) has descended from its late-July peak, now hovering near 160.00.

The cost of defending this level has become apparent, as it now appears to be a price nobody wants to be long above. The funding behind the intervention was unique, with Washington reportedly selling Euros instead of dollars to acquire yen, which lessens Japan's reliance on liquidating US Treasury holdings. Futures now give the BoJ an 82% probability of increasing interest rates at the September 17-18 meeting, compared to about 23% before the July decision.

The BoJ's policy rate would increase from 1.00% to 1.25%, marking a quarter-point rise against a federal funds range of 3.50% to 3.75%. Inflation in Japan has accelerated for two consecutive months, with July's policy statement predicting core inflation exceeding 2% from the second half of the fiscal year. One board member voted in favor of the 1.25% increase during that meeting, while eight others favored maintaining the current rate.

This case for a rate hike appears genuine, and the yen has already absorbed the entire increase without any basis points being delivered. The remaining component of the yen's recent support comes from the United States. The US Treasury's decision to at least double its purchases of longer-dated debt caused the dollar to broadly decline on August 19 and lift the yen by nearly 1% within a session, before more than half of that gain was lost the following day.

A currency supported by another country's debt management and a future decision three weeks away is not a self-sustaining currency. Japan's own economic indicators will test this pricing rather than confirm it. The corporate services price index for July, released at 23:50 GMT on Tuesday, showed a 3.2% increase compared to the prior month.

This is a clean gauge of whether firms are passing wage costs onto their counterparts. Thursday at 23:30 GMT will bring the data that truly matters. The core Tokyo inflation print, excluding fresh food, is forecast at 1.7% for August, down from 1.9%, while both headline and ex-food and energy measures have risen from a 2% prior.

Unemployment is expected to remain unchanged at 2.5%, and the jobs-to-applicants ratio at 1.19 from 1.18. A core inflation figure with a leading indicator (one in front), three weeks before the key meeting, removes one of the yen's strongest remaining arguments. The dollar's share of the pair still carries significant weight. Core Personal Consumption Expenditures (PCE) prices, released on August 26 at 12:30 GMT, are expected to rise by 0.2% month-over-month and 3.3% year-over-year.

The upcoming Federal Reserve Chair's keynote address at the Jackson Hole symposium on Friday will also influence speculative positioning. Resistance levels include the 159.50 area, capped by the 50-day EMA near 160.00 and the late-July peak close to 164.00. Support is found at the 158.50 area, with the 200-day EMA near 158.00 acting as the base of the range and the intervention low just above 155.00.

Market bias leans bearish, as only one of the two moving averages is backed by the ministry, leaving the current objectives at 158.50 followed by the 200-day EMA near 158.00. The yen's recent performance highlights the complex interplay between various global economic factors and central bank policies.