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The turnaround in the Japanese yen over the past week has been impressive. On 3rd May the USDJPY hit an eighteen-month intra-day low of 105.55. This morning it was trading above 109.20 – a gain of 365 ticks or 3.5%.

Arguably, the euro has fared even better against the yen – at least in terms of the speed of the rally. On Friday the EURJPY hit a three-year low of 121.50. Earlier today it traded above 124.30 – a gain of 2.3% in less than three full trading sessions.

Here’s the daily chart for the USDJPY. The 18-month low around 105.50 on 3rd May is circled, along with some other key levels. As we can see, the area around 105.00 has acted as both resistance and support over the last two years or so. It’s also worth considering the possible significance of 110.00. This level acted as resistance in October 2014, although it eventually crumbled after the BOJ ramped up its QQE programme at the end of that month. It’s possible the area around 110.00 could again prove significant over the next few weeks.




  
Here’s a daily chart of the EURJPY. We can see that the pair hit its lowest level in over three years on Friday last week (in other words the yen hit a 3-year high) at 121.50

We’re getting a counter-trend rally now which could have further to run. However, the overall long-term trend for the pair remains negative.




 
The yen has weakened over the past seven days thanks in no small part to jawboning by Japanese policymakers and the central bank. Earlier today Japan’s finance minister Taro Aso said that the government could intervene in currency markets to bring about stability. This followed on from his comments from yesterday when he addressed parliament saying, “…excessive volatility in yen moves that affect Japan's trade, economic and fiscal policies - be it yen rises or yen falls - is undesirable. If such moves occur, Japan is ready to intervene in the market." Last week Japan’s Prime Minister Shinzo Abe also suggested that measures could soon be taken to weaken the currency.

Taken overall, their comments suggest that the hurdle for unilateral intervention is low. This suggests there will be no objections from the US, China or other G20 members. However, jawboning a currency is one thing; actively intervening to drive your currency lower is another. The last time Japan intervened to weaken the yen was in March 2011 in the aftermath of the earthquake and tsunami. The situation is somewhat different today. The other thing is what happens if Japan intervenes but the yen strengthens again? That would damage the credibility of the government and BOJ – perhaps terminally.

So the question now is whether the yen can continue to weaken from here or whether it will run out of steam in the absence of full-blown intervention? If the yen begins to strengthen again then it means the market is calling Japan’s policymakers’ bluff. The BOJ would be forced to intervene – especially if the USDJPY broke below 100.00. The alternative is to sit tight until the next BOJ meeting and announce a whopping stimulus package then. Unfortunately the next meeting isn’t until mid-June. As we’ve seen over the last week the yen can move a long way in a short space of time.


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Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Category: PM Bulletin


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