On Monday, Japanese authorities verbally intervened in the market, warning of potential action if the yen continued to depreciate excessively. This intervention briefly caused USD/JPY to fall from 159.94 to 158.75. However, this drop proved to be a minor setback as USD/JPY reached a multi-year high of 160.39 on Wednesday. Market sentiment is understandably cautious, considering the substantial April-May slump from 160.24 to 154.40 after official intervention. The Japanese authorities and the Bank of Japan face a challenge due to the persistent interest rate differentials between the U.S. and Japan. Until this gap narrows, investors are likely to continue testing Japan's resolve.

There are market rumors of significant USD/JPY buy stops positioned above the previous high of 160.24 from April 29, but today's price movements suggest these orders might be set even higher, possibly above 161.00. The crucial question remains: at what point will Japanese authorities intervene to support the yen? While the move to 160.39 has been orderly, daily technical indicators show overbought conditions, hinting at a potential natural pullback. Although Japan might allow the dollar to climb to 170.00, the economic damage would be considerable. A sharp further depreciation of the yen from current levels could trigger intervention, making the market cautious about pushing too aggressively.

Key Points:

• Carry demand is maintaining downward pressure on the yen.
• USD/JPY has reached a fresh multi-decade high of 160.82 following the 160 break.
• Carry demand continues to favor a higher USD/JPY as U.S. yields rebound.
• Japan's Finance Minister Kanda has expressed growing concern over the yen's weakness.
• Recent rhetoric has increased the risk of potential intervention.
• Despite heightened intervention risks, the fundamental advantage remains with the USD due to its carry benefit.

Technical Levels:

• Support levels to watch are 159.72 (55-hour moving average) and 159.21 (100-hour moving average).

The ongoing fundamental and technical dynamics indicate a complex scenario where Japanese authorities might be forced to act if the yen weakens significantly, despite the underlying carry trade advantage favoring USD/JPY appreciation.

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