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Professional Speculators Happy to Sell Japanese Yen

By , Quantitative Strategist
09 March 2013 01:16 GMT
Professional_Speculators_Happy_to_Sell_Japanese_Yen_body_Picture_1.png, Professional Speculators Happy to Sell Japanese Yen

Professional Speculators Happy to Sell Japanese Yen

Fundamental Forecast for Japanese Yen: Bearish

The Japanese Yen tumbled to fresh lows as a surge in US Treasury Yields took the USDJPY to its highest since 2009. An uneventful Bank of Japan interest rate decision left focus on the highly-anticipated US Nonfarm Payrolls report, and a surge in job creation forced a similar breakout in the USD.

Recent Yen sell-offs show few signs of letting up, and continued record-highs in the Dow Jones Industrial Average as well as a sustained break higher in bond yields warn of fresh USDJPY peaks. The week ahead promises less in terms of foreseeable economic event risk, but that hardly rules out further sharp swings in Japanese Yen pairs. One particular event worth watching will be confirmation hearings on the next wave of Bank of Japan leadership.

Most expect the Japanese Diet will confirm Haruhiko Kuroda as the new governor of the Bank of Japan as well as Kikuo Iwata and Hiroshi Nakaso as the two deputy governors. Kuroda has made it clear that he would lead the BoJ to do whatever it can to end deflation and achieve a lofty 2% inflation target within two years. Iwata and Nakaso have similarly spoken in support of such policies, and their confirmation would serve as approval of a clear shift in BoJ policy. Expectations of Bank of Japan easing have inarguably been a driving force behind Yen weakness, and any risks at these confirmation hearings could force material JPY corrections.

Beyond the political risk, the Yen has remained especially sensitive to shifts in global bond markets—particularly US Treasury Yields. The 10-year US Government Bond yield finished the week above the psychologically significant 2% mark as US Nonfarm Payrolls data trounced market expectations. The long end of the Treasury Yield curve has steadily moved higher on some signs that the US economic recovery is picking up steam, but shorter-dated yields remain especially low. There is clearly further scope for further bond yield-linked USDJPY strength.

Professional speculators remain perfectly happy selling into Japanese Yen weakness, and the trend clearly favors continued USDJPY strength. The fact that the pair has cleared significant technical resistance leaves little in the way of firm profit targets, but fresh long positions are not for the faint of heart as volatility seems likely to intensify at these levels. It should be another eventful week of Japanese Yen price action, and it remains critical to watch whether recent momentum will be enough to take bond yields materially higher. Expect the USDJPY to follow. - DR

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09 March 2013 01:16 GMT