After plunging to a fresh 40 year low overnight, the yen strengthened sharply against the dollar amid rising speculation that the currency’s continued weakness may prompt a fresh round of intervention by Japan. The yen then surged again after the June US jobs report showed a much weaker picture than expected.

But let's focus on the first, more unexplained move, which took place just after 2:30am ET, when the Yen rose as much as 1% against the greenback, the most since Japan intervened on April 30. The currency later trimmed the advance, before surging again after the jobs report. Earlier in the week, the yen touched its weakest versus the dollar since 1986.

Traders were already on edge ahead of both the jobs report and the Friday holiday in the US, which creates thin trading conditions that would likely amplify the impact of any yen intervention.

“Liquidity is expected to decline during the afternoon session in New York on July 3, when US markets will effectively be closed for the Independence Day holiday,” said Masayuki Nakajima, senior currency strategist at Mizuho Bank in London. “If major US economic releases, such as the employment report, were to come in weaker than expected and trigger broad dollar selling, intervention could become tactically more effective.”

Talking to Bloomberg, Neil Jones, a managing director of FX trading at TJM FX in London, recommended buying bearish dollar-yen options. The strategy assumes “a no-warning scenario this time,” he said. While it’s difficult to time any potential intervention, he’s increasingly convinced that it will ultimately happen.

Meanwhile, South Korean Second Vice Finance Minister Huh Chang said Thursday that the government is closely exchanging information with the US and Japan regarding the forex market.

Reuters earlier reported that Japanese officials may abandon telegraphing their intentions to the market, which would be unlike the case with the intervention that happened on April 30 following ample warnings. Such a new tactic could be effective in wiping out ‌speculative bets against the currency, according to the report.

Of course, leaking this trial balloon effectively eliminates the surprise aspect, although it does force speculative shorts to cover ahead of what may come next. 

In an interview with Bloomberg on Wednesday, Japan’s top currency official, Atsushi Mimura, refrained from spelling out the finance ministry’s standard currency stance, including its readiness at any time to take “bold action”, meaning intervention.

The challenge for traders is that Mimura’s silence may on the one hand be an attempt to retain a degree of surprise, but it could also suggests that authorities may be willing to let the currency fall further before acting. Many traders had expected that the BOJ would have intervened as soon as the USDJPY hit 161. Instead the pair rose just shy of 163 before there was a notable move lower. 

Intervention “has always carried an element of surprise,” said Rodrigo Catril, a strategist at National Australia Bank. “The MOF is seemingly trying a new tactic of reverse psychology, but in practice there isn’t a great deal of difference between what they have been doing in the past.”

Meanwhile, Bloomberg reports that options traders are ramping up hedges against sharp yen swings, with a gauge of one-month dollar-yen butterfly spreads at an elevated level, suggesting that concerns about possible market intervention are increasing.

Japan spent a record ¥11.73 trillion ($72.2 billion) in the month through May 27 to prop up the yen, according to Finance Ministry figures. The ministry first stepped into the market on April 30, according to people familiar with the matter, when Japan’s currency was approaching the 161 threshold. The yen initially strengthened, moving to around 155 per dollar, but then steadily and fully retraced those gains even after the Bank of Japan raised its benchmark interest rate to the highest in 31 years on June 16.

In a note from Goldman FX traders this morning, the bank mused whether the sharp move lower was a "rate check/intervention." It laid out four points from the GS FICC & Equities desk:

• Volume was small. The spike in EBS volumes was "only" ~$1.5bn over the window — trivial versus prior confirmed interventions.
• Looks like a stop-run, not official flow. It coincided with a move back through 162, and there appeared to be a LHS TWAP flow already in the market beforehand — the desk's read is this may have simply triggered stop-losses into an air pocket.
• Range too shallow. Today's spot range was well under previous intervention days, and spot rebounded rather than seeing repeated waves of selling volume pushing lower — atypical of real intervention.
• The one caveat. There are reports that MoF is changing its intervention practice — less telegraphed, more of a "targeted campaign to squeeze speculators."

Separately, the bank also echoed the Reuters report noting that "Japanese officials warning us we won't get a warning by delivering a warning." The desk says this actually increases their comfort running a ratio USDJPY short vs. dollar length elsewhere into today's NFP, especially after the sizeable XXXJPY rally into month-end (they were correct).

Goldman's bottom line: they'd normally chalk this up to a panicky market with spot near the highs (based mainly on the light EBS volume), but point 4 raises the risk that we're in a different intervention regime and can't fully dismiss it.

“The prospect of surprise intervention should make speculators think twice before adding to bearish yen positions,” said Carol Kong, a strategist at Commonwealth Bank of Australia. “However, US yields remain the dominant driver of USD/JPY. If tonight’s US payrolls report surprises to the upside again, the pair could still push to fresh highs despite the risk of intervention.”

The payrolls report surprised to the downside instead, and USDJPY was last trading just under 161, a two-week low.