What has been driving USD/JPY after last month’s intervention driven gains?
Lead — As the USD/JPY pair retraces its intervention-driven gains, the desk posits this reflects an underlying resilience in the carry trade environment despite narrowing yield differentials. Per the full note from MUFG EMEA, the yen has lost about half of its recent strength, leading to a cautious rebuild of short positions by leveraged funds. The broader financial context remains supportive for yen-funded carry, evidenced by the recent positioning data revealing an unwind of shorts post-intervention.
What the desk is arguing
The desk asserts that the recent downturn in USD/JPY is symptomatic of a return to normalcy in speculative positioning after the impactful intervention by U.S. and Japanese authorities. Per the note from MUFG EMEA, the yen has quickly relinquished roughly 50% of its intervention-driven gains, signaling continuous support for yen-funded carry trades despite narrowing yield spreads between Japan and the U.S.
This quick turnaround of the yen points to underlying challenges. Most notably, the Federal Reserve's firm posture on interest rates has reinforced yields, sustaining robust interest in U.S. assets which in turn weakens demand for the yen. This is evidenced by the positioning data which shows a marked drop in leveraged funds' short yen positions post-intervention, illustrating how intervention can temporarily alter market dynamics.
Where it sits in our coverage
Our current consensus target for USD/JPY at year-end is 152.0 with a range between 149.0 and 161.7. Specifically, several firms have provided targets including: - goldman: 165.0 - tmgm: 161.7 - jpmorgan: 164.0
This perspective aligns closely with the consensus target, suggesting the desk's call reflects a calibrated approach towards anticipated fluctuations while emphasizing the importance of market positioning. Notably, mufg's targets are more conservative, with a December forecast at 146.0, indicating a mid-range positioning in the overall analysis.
How other firms see it
Many firms, including bofa and deutschebank, echo an optimistic stance for USD/JPY with relatively high targets for 2026, reinforcing the sentiment of resilience in the dollar. Conversely, some firms, like morganstanley, suggest a more bearish view with targets significantly lower than most, indicating a potential divide in future expectations.
Notably, the USD/JPY trajectory could be impacted by moves in the EUR/USD pair, especially in the context of potential interventions or shifts in monetary policy from the BoJ and Fed, making cross-pair movements meaningful indicators in this landscape.
01USD/JPY has relinquished about half its intervention-driven gains, driven by market adjustments.
02Speculative positioning shows a cautious rebuild of short positions in the yen.
03Current consensus targets for USD/JPY suggest a mid-range outlook for the pair in the coming months.
Market implications
Market participants should monitor USD/JPY around key psychological levels such as 160.0, as this could dictate further positioning adjustments. The gradual return of short yen positions may indicate shifting sentiment, warranting close attention to speculative flows and yield differentials that could drive price action.
Risks to this view
A significant thrust in USD/JPY could occur if the Fed signals a more dovish stance contrary to current projections, potentially halting the carry trade appeal. Additionally, a resurgence in Japan's economic data driving interest rate speculation could counter the prevailing trend, invalidating positions on the downside.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Lee Hardman, Senior Currency Analyst. It's Friday 14th August 2026 and joining Lee to pose some questions on the financial market themes for the week ahead is Henry Cook, Senior Economist. This material is only intended for professional investors in jurisdictions in which its use is permitted under applicable laws, rules and regulations.
It has been produced for information purposes only and should not be construed as investment research or advice. MUFG EMEA disclaimers and disclosures can be located on our website. Hi Henry.
Hi Lee. How are you doing? Yeah, not bad, not bad.
How are you? Yeah, all good thanks. It's good to have you here again on the podcast today.
Definitely over the last week we have seen financial market conditions calm down after the joint intervention that we saw from the U.S. and Japan at the end of July. Obviously that was intended to help support the yen and U.S. Treasury markets.
But since then we've seen the yen quickly giving back around half of its intervention driven gains. If we look at the latest positioning data from the FTC at the end of last week, we can see clearly that there was a sharp unwind of short yen speculative positions by leveraged funds after that joint intervention. So from that perspective, it was kind of relatively successful.
It did definitely trigger an unwind and discouraged kind of short yen positions that have been built up in the market. But as we've seen, I still think kind of broader financial conditions remain supportive for yen funded carry trade. So we may have seen leveraged funds kind of gradually kind of cautiously rebuilding those short yen positions over the past week, even though we have seen yield spreads between Japan and the U.S. narrowing further over the past week.
Like the fact that the yen is quickly giving back its intervention driven gains just to us kind of highlights that it's still kind of a very challenging backdrop for Japanese policymakers who still obviously want to prevent the yen from weakening further. And as we know, kind of intervention on its own really is just kind of buying time. And really for a sustained strengthening of the yen, you do need to see a change in fundamentals as well.
That's why it's quite interesting that we are seeing kind of yield spreads between the U.S. and Japan narrowing. That's been driven from both sides. So U.S. yields have moved lower over the past week.
And at the same time, we've seen higher yields in Japan. There are a couple of reasons why we're seeing that narrowing of the yield spread. What is the recent run of softer data that we've had from the U.S. starting with much weaker payrolls report and softer wage growth.
But over the past week, on top of that, we've seen kind of limited evidence of spillovers from higher energy prices into core inflation. And then today as well, we've seen a much softer retail sales print for July, which sends a kind of warning that maybe the faster pace of retail sales growth that we've seen over the last five to six months, supported by fiscal stimulus, that now appears to be kind of waning off. And this could be the start of maybe a softer run of consumption growth in the second half of this year.
So when you kind of put it all together to us, it gives the Fed more leeway to leave rates on hold. There's definitely not a pressing need going into the September meeting for them to begin hiking rates. So that is encouraging the U.S. rate market to move more in line with our view, which we've been kind of saying some time that we think the Fed can leave rates on hold in September.
And I think if they do do leave rates on hold, it does leave the potential there for the dollar to to re-weaken as we we head into the year end. And in terms of the BOJ outlook, how do you see that? Yeah, I think the BOJ outlook has changed as well, quite significantly over the past couple of weeks.
If you look at the pricing in the Japanese rate market, you can see now that the timing of the next rate hike has been brought forward to the next meeting in September. I think there's around 20 basis points of hikes priced in, which even a couple of months ago would have been seen as something which was very unlikely to materialize. I think when we were calling for a September hike, we were very much kind of out on a limb on our side as probably one of the most hawkish forecasters in the market.
But that's looking more and more likely now after recent developments. So we've had much more hawkish rhetoric from BOJ officials, including Governor O'Reader at the last press conference, where he signaled that definitely a September hike is on the table. And since then as well, we've also had kind of media reports suggesting that the Japanese government is supportive for the BOJ to deliver another rate hike soon.
To us, that kind of fits with our own view that we think the U.S. agreed to joint intervention alongside Japan so long as the Japanese government was also willing to do more in terms of allowing monetary policy to continue to normalize. Like you say, the U.S. is obviously of the same view that you need to see a change in fundamentals for the yen weakening trend to reverse. And one of the kind of key drivers which could trigger a more sustained strengthening of the yen would be if we were to continue to see yields in Japan moving higher from here.
So we do think that those developments are definitely moving in a more supportive way for the yen. But as we've seen over the past week, maybe not yet sufficient on their own to turn the tide in the FX market. I know, Henry, you've also been kind of looking at recent economic developments here in Europe.
What have been your kind of main focus points over the past week? Yeah, it's been relatively quiet here. Not much data out recently.
We did have the UK GDP numbers for Q2, and it was a pretty good number, 0.4% quarter and quarter, which I think should be seen as a pretty good result in the circumstances against that backdrop of Middle East uncertainty, higher energy prices. Yeah, it's been a story of resilience for the UK economy, but in context, really, I was looking back at my forecast in January at the start of this year, and I was expecting UK growth at 1.2%. And that's exactly what I am now tracking, despite everything that's happened in the Middle East.
So that kind of shows the kind of resilience, the resilience story here in terms of the actual drivers of the Q2 growth figure. Mostly it was an investment story with a bit of support from consumer spending. There was a bit of a drag from government consumption after schools were closed during the heatwave.
Hot weather might have affected construction output as well, but boosted hospitality spending. So there were some kind of volatile factors here. I think in terms of the overall picture, it's one of resilient domestic demand in the UK and that's been underpinned by strong services sector output.
Interesting. Looking at the service sector data in more detail, there has been some kind of optimism recently that maybe the UK economy could be boosted more from the rollout of AI. Do you see any signs of that?
Yeah, absolutely. I think there is a kind of broad cyclical recovery in professional services especially, but I think that is being boosted by AI adoption in the UK economy. In particular, it's increasingly showing up in the CapEx numbers, in the investment numbers.
Business investment was strong in the GDP figures, 1.7%, quarter and quarter. That's a good result. And it was noted that information and communication technology was a big driver of that.
And I think taking a wider view, I think there is some interaction here with the kind of post-Brexit catch-up dynamic. If we cast our minds back, business investment was essentially stagnant in the UK for quite a long period after the Brexit referendum. So there is a kind of catch-up dynamic there.
I think in many cases, AI is proving to be the catalyst for stronger CapEx in the UK economy. Does that make you kind of more optimistic over the outlook for growth going forward? Yeah, yeah, I think that will underpin and support activity going forward.
In the near term, the June monthly GDP figure, that was quite good, 0.3% month on month, which kind of points to strong momentum into Q3. Survey data has been OK in July. We'll get the PMIs for August next week.
Look, I mean, I think the economy would do well to repeat the performance that we saw in Q2. Energy costs, energy costs are still passing through to the economy. Inflation is set to rise over coming months.
I'm kind of penciling in a peak of around 3.5% in Q4. This will all chip away at real incomes. And the other big kind of risk theme, of course, is the UK budget in the autumn.
That's looming over everything. In recent years, we've had this pattern of speculation about potential government policies weighing on spending and investment decisions in the autumn. I mean, the new prime minister, he's started relatively well looking at the polling numbers, but the fiscal reality remains the same.
There really isn't much space there to do anything. Those kind of good GDP numbers we've talked about, they help a little bit. But in terms of the fiscal headroom, it's completely dwarfed by higher borrowing costs following the U.S.-Iran conflict and also a higher defence spending commitment.
So, yeah, the kind of OBR's estimate of the headroom, I think, could be slashed in half coming into this autumn budget period before any new policies are announced. So it's going to be difficult. I think there is a good chance that speculation weighs on UK activity again in the autumn.
But yeah, if we look past that kind of volatility, as I said, it's been a good start to the year. That does show a degree of resilience and kind of on an annual basis, as I said, 1.2% GDP growth would be a good outcome. It might disguise a kind of bumpy profile, but yeah, it would be a decent enough outcome for the UK economy.
How do you think that would kind of feed into the Bank of England's decision making? Yeah, I mean, they will note the resilience of the economy for sure. Our base case remains that policy rates will be left unchanged this year.
There's plenty of slack in the UK labour market. Vacancies are pretty low. There's essentially no evidence of second round effects from higher energy prices in the broader inflation numbers still.
As I said, next week we get the PMIs. Those will shed a bit more light. We also get the latest inflation numbers for July.
We get the latest labour market numbers. So it will be a busy week of data next week, a lot of stuff which will be relevant for the Bank of England. I think for now, you know, the Bank of England officials, they're not showing much urgency as a whole.
There are some hawkish dissenters, of course, but as a whole, not much urgency there. In particular, you know, that could change, especially US-Iran. We've talked about it.
That situation remains unresolved. But our sense is that the MPC as a whole would like to hold off from raising rates if it can. And so our central scenario is that UK bank rate will be left unchanged.
Great. Thanks, Henry, for sharing your thoughts on the UK economy and Bank of England policy. That brings an end to today's podcast.
Thanks, everyone, for listening and have a good week ahead. Thank you for listening to this MUFG Global Markets podcast. Rate, review and subscribe.
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