Beware as JPY enters intervention territory
For most of this year JPY has been in a monster rally, but has now reached levels where traders should be cautious – because there’s a growing risk that the Bank of Japan will become very aggressive in trying to halt any further rise.
That danger level is USD/JPY 100 - roughly where the pair finished on Friday – marking JPY’s fourth consecutive weekly rise. But this level is a psychologically important one, which the BoJ won’t want to see permanently breached and several times last week it did briefly go below 100.
In Fairness, Japanese policy makers have been fighting a losing battle for several years to stem the mighty JPY with little success. But Japan’s authorities are unlikely to just give up with the Finance Ministry saying that it’s closely watching the exchange rate – a warning to the markets that it’s prepared to consider intervening to reverse the trend.
Japan’s authorities have been relatively placid over JPY in recent months possibly due to fear of escalating tensions with trading partners such as China and the US over currency manipulation.
Such are the dynamics of the global economy – worries over growth, deflation, future of the Eurozone, China concerns, terrorism, ageing populations, a return of capital rather than return on capital mentality by investors – that the trend on JPY will be difficult to reverse as it is considered as a safe haven currency. Also, Japanese investors have stemmed hedged purchases of US Treasuries recently (which yield far more than their Japanese equivalents) – due to interest swap rates no longer making the move viable.
And come September when fund managers return to their desks they may decide that the recent rally in stocks has been overdone and opt for a big sell off – sending traders rushing for the safety of JPY.
However, the BoJ can orchestrate some very short, sharp and damaging counter-rallies, which can quickly decimate trader’s P&Ls – which is exactly what the central bank wants to do i.e. make it dangerous to hold the currency.
So what could stop the mighty JPY in its tracks if Japan’s authorities can’t?
Two things basically – one is for the recent stock market rally to gain conviction from September onwards, possibly in the hope of more fiscal stimulus programmes around the world or Hilary Clinton looking set to decisively win the US Presidential elections. In other words, it becomes a risk-on world.
The second factor would be for the US to re-start raising interest rates – indeed, former US Federal Reserve chairman, Alan Greenspan predicts that not only will US interest rates rise soon, but could go up rapidly. The markets are not expecting a fast rise in US interest rates and if that did happen that would likely see a very strong USD rally.
Potential market catalysts for this week include BoJ governor Kuroda speaking on Tuesday, US core durable goods orders and weekly unemployment claims on Thursday and on Friday it’s US preliminary GDP and Fed chairwoman Yellen may also speak on that day.
TECHNICAL ANALYSIS: USD/JPY – battle lines drawn over 100 level
JPY is the best performing major currency so far this year – and it looks like it wants to rise further.
The market is making its third attempt to clear support at USD/JPY 100.00. The last two attempts in recent history where in June when it briefly made a quick stab at 99.04 before recovering, it then tried again at the beginning of July when it hit a low of 100.20 only to rebound to 107.49.
The third attempt is looking more promising with USD/JPY 100.00 having been punctured several times over last week possibly as support is eroding.
It’s quite likely that the battle over the psychologically important 100 level will play out over this week with further successes on the downside. But in the immediate future, USD/JPY may struggle to decisively clear this level – it may take a fourth attempt to declare victory.
A short-term counter-rally probably isn’t far off either. Last week the slow stochs looked like they were generating a strong buy signal for USD/JPY and if the lower Bollinger band is pierced it very likely will spur a rebound. Also, the RSI is inching towards over-sold territory. In other words, there’s some scope for more downside attempts, but probably not by much in the very short term.
Support can be seen at 99.64, 99.54 and 99.03 with longer-term downside target of 95.00. Resistance is placed at 100.90, 101.29 and 102.51. Rebounds will be seen by traders as an opportunity to short USD/JPY.
By Justin Pugsley, Markets Analyst, MahiFX