Diary of a Financier

USDJPY Sliding Down through Support

In Capital Markets on Tue 12 Jul 2011 at 14:13
  • USDJPY breaking through crucial support on BOJ unanimous decision to defer further loosening.
  • JPY will continue strength toward March 2011 highs in the short-term, especially with the help of EUR weakness & traders getting the “all-clear” from BOJ.
  • Expect BOJ intervention when USDJPY hits 79 again.

Last night, the Bank of Japan voted to refrain from further loosening for the time being.  From the New York Times:

As widely expected, the Bank of Japan kept its benchmark interest rate steady at a range of zero to 0.1 percent by a unanimous vote and held off on loosening monetary policy further…

That brighter view reinforces investors’ expectations that no immediate monetary easing is on the horizon…

The Bank of Japan has stood pat on monetary policy since easing credit just days after the earthquake by topping up a pool of funds to buy assets ranging from government bonds to corporate debt.

It has expressed its readiness to ease policy further if the damage from the quake proves to be bigger than expected, although recent upbeat economic data has reduced expectations of imminent central bank action.

While that decision was widely expected, it immediately opened the door to a rush of JPY buying, specifically selling USD against JPY.  The selloff in EURJPY began this past Friday, as precipitated by Euro crisis contagion.  In contrast, USDJPY has held it support until this morning’s BOJ announcement.

Beyond the vacuum of USDJPY spot FX, the 1% intraday drop in this exchange rate has turned the US Dollar Index (DXY) negative, despite EURUSD deteriotion putting the wind at its back.  (It’s very much a testament to the weak fundamentals of the US economy.  The US has–and will continue to–benefit from its fortune of being the least-sick patient in the terminal ward.)

My focus in this entry is USDJPY, which I’ve mentioned slid upon the BOJ announcement.  Interestingly, that slide took the pair below the critical support of 80.30:

USDJPY daily- breaks support @ 80.30

Here’s a view of the monthly chart, which shows the historical support dating back to April 1995:

USDJPY monthly- spread support

JPY breached that support once during the earthquake 1q2011.  The BOJ stepped in (as it has in the past) to weaken JPY in defense of its exporters/competitiveness.  I shorted JPY last time we touched that threshold, but this go-around looks more conducive to continuing the rally.  With traders challenging the BOJ to act, I find no high-probability opportunities here, so I won’t trade this breakout.  As an important variable in my UUP long position @ $21.39 on 7/6/11, I have to follow this JPY breakout.  (See USD Outlook.)

I have to be honest, this looks to continue sliding over the coming weeks-months, but it is nearing the bottom of its trading range in the weekly chart:

USDJPY weekly- still sliding, but nearing the bottom of its trading range.

The daily chart also suggests continued weakness, but note the momentum building in the background; the next reversal off bottom could take longer-term charts with it:

USDJPY daily- still room to slide lower, but momentum building.

.

USDJPY daily- resting on bearish short-term trendline

Judging by today’s action, traders are giddy over JPY now that the BOJ has decided to sit-out this round.  BOJ will reload to fight JPY appreciation another day, but right now, there’s very little opposing a move higher.  The BOJ may be wise to conserve resources for the long-term, since the EUR is inertially weakening against all comers. Expect an emergency BOJ meeting as USDJPY hits 79 en route to the 77.66 level from March 16, 2011.

–Romeo

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  1. I nailed the psychology at the BOJ. USDJPY @ 78.98 this morning and the easing chatter begins:
    “Japanese Finance Minister Yoshihiko Noda warned on Thursday that recent yen strength does not reflect economic fundamentals, escalating a verbal campaign to cool the rising yen…
    ‘Japanese intervention is less likely to succeed [right now], because we have very negative news about the United States and Europe.'”

    http://www.reuters.com/article/2011/07/14/us-japan-economy-noda-idUSTRE76D0C220110714?feedType=RSS&feedName=businessNews&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+reuters%2FbusinessNews+%28News+%2F+US+%2F+Business+News%29&utm_content=My+Yahoo

  2. […] near-term, the door is open for the Bank of Japan to intervene in weakening its Yen.  Recall my comments from July 12: JPY breached that support once during the earthquake 1q2011.  The BOJ stepped in […]

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