Verbal intervention by Japanese authorities may only temporarily halt yen strength

The Japanese yen hit multi-week highs of 99.53 against the US dollar on Tuesday's trade, before paring some gains to close just above the 100 mark. Apart from broad-based US dollar strength, the yen has been undermined overnight by Japanese policymakers stepping up verbal intervention in response to USD/JPY falling below the 100.00-level.

Japan's Vice Minister for International Affairs Masatsugu Asakawa has stated that Japan is closely watching for “speculative” moves with a strong sense on concern. He noted that if there are extreme FX moves Japan will have to act while keeping in close contact with other G7 nations.

Verbal intervention may only temporarily halt yen strength, but it will not reverse the stronger yen trend. Fed hike bets will be a major driver for price action in the pair. Hawkish Fed talk overnight keeps dollar and hence USD/JPY supported. NY Fed president Dudley warned in the NY session on Tuesday that markets are too complacent about rate hike risks. Dudley said he expected stronger growth in US in H2 than in H1 and further improvement in the labour market.

"We still believe that direct intervention remains unlikely in the near-term given strong opposition from the US. It is also difficult to argue that fundamentals justify intervention. While the yen is stronger now we believe that it is only closer to fair value, and yen volatility has eased recently,” said Lee Hardman, Currency Analyst at MUFG.