[MARKET UPDATE] Large downside seen in USD/JPY

Large downside seen in USD/JPY.

Sharp downside in USD/JPY has historically resolved into one of two patterns, and the first question is which applies: a broad dollar move, in which case the other dollar pairs should be moving in sympathy and the driver sits in US rates or risk appetite, or a yen-specific move, in which case the cross is falling faster than its peers and the usual suspects are a shift in Bank of Japan signalling, verbal or actual intervention from the Ministry of Finance, or a disorderly unwind of crowded yen-short carry positioning. Intervention episodes in the past have tended to produce steep, fast declines concentrated in thin liquidity windows, followed by attempts to retest prior levels over subsequent sessions unless rate differentials were narrowing for other reasons. A yield-driven leg, by contrast, tracks moves at the front and belly of the US curve and tends to hold better. Worth establishing are the speed and timing of the move, whether Japanese officials are commenting, and whether the decline is corroborated in yen crosses such as EUR/JPY, which distinguishes yen demand from dollar supply. Absent confirmation of either driver, headline flow of this kind has often partially retraced once the initial momentum clears.