G20_Gives_Traders_All-Clear_to_Sell_Yen_-_Will_Bank_of_Japan_Comply__body_Picture_1.png, G20 Gives Traders All-Clear to Sell Yen - Will Bank of Japan Comply?

G20 Gives Traders All-Clear to Sell Yen - Will Bank of Japan Comply?

Fundamental Forecast For Japanese Yen: Neutral

The Japanese Yen finally showed signs of life as it rallied strongly against the US Dollar and other major counterparts, but lack of action from a highly-anticipated G20 meeting gave traders the “green light” to continue selling into JPY weakness.

Price action across broader FX markets was especially indecisive in Yen pairs, but an important week of Japanese economic event risk gives hope we might see more definitive swings ahead. The JPY trades within rounding error of the psychologically critical ¥100 mark, and we get the sense that this might be the week it actually takes out the key threshold. All eyes turn to the Bank of Japan’s key interest rate decision on Thursday night/Friday morning, while the prior day’s Consumer Price Index inflation data could likewise elicit reactions from JPY pairs.

It is difficult to understate the significance of the Bank of Japan’s hyper-aggressive Quantitative Easing measures to date, but the dramatic Japanese Yen sell-off suggests traders will want to see a firm commitment to continued easing if it proves ineffective. Indeed, the BoJ trounced market expectations for QE in its March meeting and sent the domestic currency into a tailspin. But if their bombastic actions did anything, it set the stage for similarly lofty expectations for future rate decisions.

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Keep an eye on JPY pairs leading into the BoJ rate announcement—especially if the USDJPY rallies further and trades to fresh multi-year highs ahead of the central bank meeting. Recent CFTC Commitment of Traders data shows that large speculators near their most net-short the Japanese Yen (long USDJPY) since it traded near ¥120 six years ago.

It’s questionable to expect the BoJ would announce further easing after obliterating market expectations for QE in March, but you have to wonder what they could say that could force further JPY losses. If history is any guide we could see some aggressively short speculators take profits ahead of the BoJ meeting and some Yen strength (USDJPY weakness). Predicting market reactions is an entirely different matter, of course, and we’ll keep a close eye on the next moves in the highly-volatile Yen.

Last week we wrote that our volatility-friendly breakout trading system stood to gain on sharp moves in JPY pairs, but choppy price moves made for difficult conditions for the price-following strategy. Past performance is not indicative of future results, but our back and forward-tests show that breakout trading tends to do well if FX options market volatility expectations remain high. It’s with that in mind that we like certain trade setups with our breakout system, but it will be important to keep trading leverage low on what promises to be another big week for the Japanese Yen. - DR