Dollar Surge Against Yen May Be Interventions Waiting Game

A sudden shift in front-end US rates has given the dollar a significant boost against the yen. Over the past five sessions, the correlation between USD/JPY and US two-year yields has surged to +0.98, an extremely rare positive relationship going back decades. The hawkish Fed's rate hike expectations have propelled markets to price in another three increases by June next year, sending yields further out the curve sharply higher.

However, this move may have sown the seeds of a potentially bigger threat: renewed intervention activity. During the North American session on Friday, after USD/JPY tagged 158, the pair suddenly dropped by more than 75 pips in little over a few minutes, reacting to what was a suspected rate check from Japanese authorities.

The timing is telling, coming ahead of a five-day long weekend in Japan where market liquidity will be extremely thin. This provides an ideal environment for either Japanese or US authorities to intervene to support the yen. The risk of renewed intervention activity will be elevated, particularly early in the week.