• USD/JPY gains strong follow-through positive traction for the second straight day on Monday.
• The wide US-Japan rate differential undermines the JPY, while Hormuz risks benefit the USD.
• Intervention risks might hold back the JPY bears from placing fresh bets and cap spot prices.

The USD/JPY pair builds on its goodish recovery from the 160.50-160.45 region, or over a two-week low touched on Friday, and gains strong follow-through traction for the second straight day on Monday. The strong intraday move higher lifts spot prices back closer to the 162.00 mark during the Asian session, keeping traders on high alert amid expectations of a possible intervention by Japanese authorities.

In fact, Japan’s Finance Minister Satsuki Katayama said on Friday that officials are ready to act appropriately to currency fluctuations. Moreover, Japan's Chief Cabinet Secretary Minoru Kihara reiterated that the administration is closely monitoring FX moves and is ready to intervene when needed. This might hold back traders from placing aggressive bearish bets on the Japanese Yen (JPY) and act as a headwind for the USD/JPY pair.

However, a persistently wide interest rate differential between Japan and the US continues to fuel the so-called carry trade and weigh heavily on the JPY. The Bank of Japan (BoJ) lifted its policy rate to the highest since 1995, to 1.00% in June, while the US Federal Reserve (Fed) maintained the interest rate target range of 3.5% to 3.75%. This, along with economic risks stemming from Middle East tensions, undermines the JPY and supports the USD/JPY pair.

Tensions surrounding the waterway remain elevated as Iran seeks to tighten control. In fact, Iran’s ambassador to China said on Saturday that Tehran plans to introduce new service fees for ships passing through the strategically important waterway, though the US had rejected the idea of Iran charging vessels for using the strait. Nevertheless, the standoff revives demand for the safe-haven US Dollar (USD) and further acts as a tailwind for the USD/JPY pair.

Meanwhile, any meaningful USD appreciation seems elusive in the wake of receding US Federal Reserve (Fed) rate hike bets, especially after the release of the soft US Nonfarm Payrolls (NFP) report last Thursday. Furthermore, easing inflation fears in the face of the recent slump in Crude Oil prices could allow the US central bank to adopt a more patient stance and cap the USD, warranting caution before placing fresh bullish bets on the USD/JPY pair.