ING’s Francesco Pesole warns that USD/JPY short-dated implied volatility is not reflecting renewed intervention risk as the pair retests 160.0. Markets seem to expect the Bank of Japan’s June meeting to help cap the pair. He argues authorities may tolerate a higher threshold, possibly 162–163, and expects markets to keep testing the topside in a seasonally weak month for the Japanese Yen.

Yen faces renewed intervention threshold risk

"USD/JPY short-term implied volatility (1 week to 3 months) has followed the broader drop in G10 volatility, failing to show the risk of renewed FX intervention as the pair nears 160.0. Markets may be assuming the BoJ will wait to see whether a 16 June hike (19bp priced) can cap USD/JPY."

"After the largest intervention since 2004 in April-May, there is also a growing sense that such a pace cannot be sustained. It may also reflect market expectations of restraint given the IMF’s guideline of a maximum of three intervention episodes within any rolling six-month window to preserve “free-floating” status."

"Still, the risk of new intervention does look a bit underpriced, considering Japanese authorities have remained rather hawkish with their intervention narrative. The new bar may be set well above the 160.60 level where they intervened in April, perhaps 162-163."

"We think markets will keep testing the topside in USD/JPY, also considering June is a seasonally weak month for the yen."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)