Global foreign exchange markets have received a significant signal. An "oral intervention" action involving the US central bank, targeting the yen, is forcing traders to reassess the outlook for USD/JPY and prepare for potential coordinated currency intervention. This marks a potential major shift in the US stance towards the forex market.
The core of the action was the "rate check" conducted last Friday by the New York Fed on behalf of the US Treasury. This move was widely interpreted by the market as the strongest "verbal" warning yet that US and Japanese authorities might jointly intervene to support the yen. Japanese Finance Minister Shunichi Suzuki subsequently stated that the government is responding to exchange rate fluctuations in the spirit of the US-Japan joint statement, further fueling speculation of coordinated action.
The event quickly sent ripples through the forex market. The USD/JPY rate plummeted from Friday's high of 159.23, briefly falling below the 154 level during Monday's Asian session, marking one of its largest single-day declines this year. The options market also reacted violently, with short-term volatility expectations surging, indicating traders are urgently pricing in potential intervention risk.
The market impact was immediate. Analysts pointed out that US involvement significantly enhances the credibility of the intervention threat, forcing a large number of yen short positions to unwind hastily. The effectiveness of this "oral intervention" has far exceeded Japan's unilateral actions in recent years, suggesting a new phase of forex dynamics, potentially led by US-Japan coordination, may be beginning. What is a "Rate Check": The Strongest Oral Intervention Signal A "rate check" refers to an action where a country's central bank or monetary authority asks major commercial banks for their foreign exchange buy/sell quotes. This is not an actual transaction itself, but its signaling effect is extremely significant, often viewed as a direct warning that officials are seriously dissatisfied with the exchange rate trend and may take actual action at any time.
According to Bloomberg, Adam Crook, a forex trader at Goldman Sachs, noted that a high-profile "rate check" is the most potent policy tool short of actual intervention, and if it fails to work, actual intervention often follows within a week. The special aspect of this signal is US participation. The New York Fed's action suggests intervention has escalated from a unilateral Japanese concern to a potential bilateral, coordinated action between the US and Japan.
Historical data shows a high probability of actual intervention following a "rate check". The most recent reported "rate check" occurred during the July 2024 intervention, and the one before that was on September 14, 2022, after which Japanese authorities implemented yen-buying intervention about a week later. The fact that the Fed conducted this check "on behalf of" the Treasury is seen by the market as having greater symbolic meaning and deterrent power than previous instances. Market Reaction: Shorts Retreat and Options Market Reprices The intervention threat immediately reversed market sentiment and capital flows. The USD/JPY rate fell sharply on the news, with intraday volatility intensifying. More importantly, a fundamental shift occurred in the behavior patterns of market participants.
Goldman Sachs' trading desk indicated that the previous widespread strategy of "buying USD/JPY on dips below 154" has completely vanished. Trader Kristian Brauten-Smith stated there is currently almost no interest in buying USD/JPY, limited only to profit-taking on existing cash short positions. This shift in mentality is creating heavy upside pressure on the exchange rate.
The reaction in the options market was even more dramatic. As reported by Reuters, last Friday afternoon, the USD/JPY short-term risk reversal indicator closed at 3.5 vols, indicating the market is paying a high premium to hedge against a sharp short-term yen appreciation. Goldman Sachs options trader Jemima Currie pointed out that the market has fully priced the recent intervention risk premium into the curve, to an extent nearing levels seen during the unwinding of yen carry trades in July/August 2024. New Equilibrium Range: 147-149 Becomes Medium-Term Focus As the intervention threat alters market dynamics, analysts have assessed potential new equilibrium ranges for USD/JPY. A key consensus is forming: the 147-149 area could become a critical level attracting substantial buy-side interest in the medium term.
Goldman Sachs trader Kristian Brauten-Smith analysis suggests that, given this intervention could have more lasting effects and other G10 currencies are already about 10% stronger against the USD than before, firm buyers for USD/JPY may not emerge until the rate falls to the medium-term range of 147-149. This judgment is also supported by fundamental analysis. Goldman Sachs recommends trading strategies including buying 151/147 binary put spreads, as the level around 147 represents the USD/JPY fair value implied by the 10-year real interest rate differential.
However, the path downward is not without obstacles. Goldman Sachs trader Masaaki Shinotsuka noted that due to pressure on balance sheets from Japanese Government Bond-related issues, there is serious doubt about whether domestic Japanese investors can actively take on new FX risk in the current environment. This limits the potential buying power for the yen. Deeper Game: US-Japan Policy Coordination and Long-Term Dilemma This event transcends mere forex volatility, revealing deeper policy coordination between the US and Japan, as well as Japan's long-term currency dilemma. George Saravelos, Global Head of FX Research at Deutsche Bank, noted that the threshold for US participation in intervention seems lower than historical precedent, potentially indicating a greater US willingness to assist other large economies in preventing excessive currency weakness, which could also be seen as a broader signal of US acquiescence to dollar depreciation.
However, intervention cannot solve the root cause of yen weakness. Analysts widely agree the core drivers are Japan's deeply negative real interest rates and the market's perception that the Bank of Japan is lagging in policy normalization. Goldman Sachs states that intervention is, at best, a temporary solution to buy time while waiting for new macro drivers. If new catalysts fail to materialize, the yen and JGBs could still fall to new lows in the medium term.
Japanese authorities appear caught in a dilemma: on one hand, fearing to fundamentally support the yen through significant rate hikes, and on the other, attempting to leverage the Fed's power to do this "difficult work." The sustainability of this reliance on external rescue is questionable.
With Japanese elections approaching, this exchange rate volatility is also seen as a timely "warning" ahead of the polls. The market is closely watching whether this yen storm triggered by the "rate check" is a short-term episode or the prelude to a new era of "currency wars" or even a "Plaza Accord 2.0." For investors, the 147-149 exchange rate range has become a crucial marker for judging future direction.