Japanese Yen: Will The Intervention By the Bank of Japan Work?

Japanese Yen: Will The Intervention By the Bank of Japan Work?

Fundamental Forecast for Japanese Yen: Bearish

• Japanese Yen Collapses on BoJ Intervention
• Yen Drops as Japan Intervenes, Dollar’s Fate Clouded on Neutral Risk Trends
• Policy Makers Keep Trades Off Balance with Intervention Threat

After maintaining its descending channel for more than three months, the USDJPY finally crossed over the upper bounds of its range, and now looks poised to test 87.50 in the near term. Indeed, the yen was the biggest loser against the U.S. dollar amongst the G-10 currencies as the Bank of Japan intervened in the FX markets for the first time since 2004. Going forward, the Japanese yen may continue to lose ground against the greenback as the recent technical and fundamental developments points to further gains in the exchange rate.

Subsequent to much anticipation, and entering into a period in which markets discounted intervention by policy makers in Japan following the re-election of Prime Minister Naoto Kan, the central bank stepped in to stem the appreciation of the yen. The day prior to the BoJ’s move, Mr. Kan was re-elected the head of the ruling Democratic party in Japan. Preceding his re election, the Prime Minister did not show an aggressive stance toward currency intervention, which lead to the immediate rally in all major currencies against the yen. The weaker yen does more than just support exporters; it can also solve Japan’s deflationary issues. With the BoJ’s action now behind us, the question that now arises is, whether the yen will continue to deteriorate or return back to recent highs? For Japan, next month’s monetary policy meeting will be extremely important in that the intervention will need to be supported by additional quantitative easing. Until October, the yen may display a lackluster performance or weaken further if the FOMC minutes next week is more optimistic than the previous meeting, and in turn fuels risk appetite.

For this upcoming week, the economic docket for the world’s third largest economy is relatively weak as traders face the nationwide department store sales, machine tool orders, and the all industry activity index. However, it is worth noting that the final reading for the leading index is on tap. Movements in these figures usually precede larger developments in the domestic economy. The reading is widely expected to stay above 50, but will likely contract from June’s reading of 99.0, which does not bode well for the region. Away from the docket, traders should not overlook another intervention by the central bank as Japan’s Finance Minster Noda pledged to take bold action in the yen if necessary.

With regards to price action, technical analysis favors a weaker Japanese yen against the U.S. dollar. The USDJPY recently broke above its descending channel which remained intact for over three months. At the same time, our speculative sentiment index now stands at 2.10, which is off of its extreme of 7.0. Going forward, we could possibly see a test towards 87.50. -MW