The Japanese yen extended its winning streak against the US dollar, breaching the 155 level and triggering a cascade of stop-loss orders, pushing the currency toward its strongest point of the year. As momentum builds, traders are now zeroing in on the 152 region as the next pivotal battleground.
The yen climbed as much as 0.4% to 153.80 on Tuesday, building on Monday's 1.2% rally, bringing its monthly advance to nearly 4% - the best performance among Group of Ten currencies. According to a trader familiar with the transactions who requested anonymity, the dollar-yen pair's drop through 155 activated a wave of stop-loss orders and compelled options dealers to offload dollars.
This yen move isn't attributable to a single catalyst. Some traders point to thin liquidity around the US holiday period, while others argue that the break above 155 merely accelerated a rally already in motion. The currency began strengthening last week as market expectations for a Bank of Japan rate hike gained traction, triggering a sharp reversal in sentiment. Additionally, speculation regarding potential adjustments to the asset allocation of Japan's Government Pension Investment Fund has provided further support for the yen.
"The overnight break of the support zone has clearly opened the door for further downside," said Rodrigo Catril, strategist at National Australia Bank. "Dollar-yen seems highly likely to test the previous lows around 152.27 and 152.10."
The 152.10 area represents the yen's strongest level against the dollar this year, and its significance is growing as upward momentum builds. Technical indicators suggest that after breaking support near 155, 152 could serve as the next downside target. Forex traders are turning their attention to the next threshold for dollar-yen, with the 152 zone emerging as a likely candidate as bearish momentum accelerates, according to analysts.
Motonari Sakai, head of forex trading at Mitsubishi UFJ Trust and Banking, noted that if the yen breaks through the 154 low, the next target could directly point toward the 152 range. The improving trajectory of the yen is also reflected in the options market. Despite Monday being a US holiday, global FX contract volumes remained substantial, with yen cross pairs particularly active.
The surge in one-year yen forward contracts underscores the scale of yen short covering, with these positions currently being unwound against the euro, pound, and Swiss franc. This dynamic is intensifying downward pressure on dollar-yen. The velocity of this move has sparked concerns about a potentially broader unwinding of yen-funded carry trades, where investors borrow yen at low cost to invest in higher-yielding assets elsewhere.
Rinto Maruyama, senior rates and FX strategist at SMBC Nikko Securities, commented: "Our base case is that a yen break below 154 could trigger further unwinding of yen carry trades and the placement of additional stop-loss orders, leaving room for further yen appreciation." He added that reduced positioning also creates opportunities for investors to re-establish yen short positions.
Data shows the yen has fallen more than 1% against high-yielding currencies such as the Brazilian real and South African rand. A senior FX options trader at Nomura Securities observed that "the era of easy carry trades is over, and the scale of cross-border flows from Japan to the US may have changed substantially."
Attention now shifts to Friday's US CPI report for clues on the Federal Reserve's policy trajectory. In Japan, investors will closely monitor comments from Bank of Japan board member Naoki Takada for signals on the pace of future rate hikes. Takada has previously made clear that future rate increases won't be rigidly limited to 25 basis points, and that consecutive hikes are possible under normal circumstances.
His comments come just three months after the June rate hike; a move on September 18 would mark the fastest tightening pace under Governor Kazuo Ueda's tenure. The bigger test lies in next week's BOJ policy meeting. Overnight index swaps currently price in a 97% probability of a 25-basis-point hike, raising the bar for policymakers to deliver a sufficiently hawkish message to sustain yen appreciation.
"The yen is at a crossroads," Catril said. "Next week's hike is necessary, but to maintain the yen's recent gains, the BOJ needs to deliver a hawkish signal and reaffirm market expectations that another rate increase is more likely than not before year-end."
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