Forex Journal

After yet another Japanese yen intervention by the Ministry of Finance, investors and traders around the world are questioning the “real” impact on the currency’s eternal price appreciation. Technical evidence suggests that although the initial reaction on the Japanese yen, post intervention, was stronger than after previous attempts; each one is actually having a decreased price effect as the credibility of the Bank of Japan’s ability to influence the yen diminishes for traders. 

USD/JPY remains bullish over the medium to longer-term, but in the short-term expect another post intervention retracement (PIR), which may carve out a fresh new record low. Sentiment proxies within the option market suggest that buying pressure is still overcrowded as everyone continues to try to be the first to successfully call the market bottom. This may trigger a temporary, but dramatic, price spike that would help flush out a number of large downside barriers and stop loss-orders. 

Keep alert for a 40-year long-term cycle on USD/JPY verging on a major reversal into November/December 2011. This is further supported by monthly bullish DeMark™ exhaustion signals. A confirmation above $80.60 is required to launch a powerful recovery toward $83.30 and $85.50 with upside scope into $94.00. Global market attention and the potential major trend reversal will keep volatility high for a while. However, the major cycle reversal in the Japanese yen will be driven by broad weakness across a variety of other currencies.  In relative terms, high-yielding currencies such as Turkish lira (TRY), Brazilian real (BRL), South African rand (ZAR) are setup to gain most from yen weakness. 

JPY Intervention – How credible is the 3rd STRIKE?

•           After yet another Japanese yen intervention by the Ministry of Finance, investors and traders around the world are questioning the “real” impact on the currency’s eternal price appreciation. 

•           The estimated ¥7 trillion injection used to counter the yen’s record overvalued levels, which continues to hurt the nation’s competitive export-led economy, was the largest on record, overshadowing previous efforts last seen in August 2011.

Indeed, the vast amount of government liquidity marked a large carbon footprint that saw USD/JPY rocket by over 400 pips in just a few minutes from new post-World War II record lows at $75.35.  The net effect was largely positive for the U.S. dollar, boosting the DXY (which allocates its second largest weighting of 13.6% to JPY). 

•           This also helped trigger a loud firing shot across popular risk proxies such as EUR/USD, AUD/USD and developed equity markets including the S&P500, which all reversed sharply from key chart levels, back under their long-term 200-day moving averages.

But will the third intervention strike by the Japanese authorities this year be enough to hold back the Japanese yen’s painful appreciation?  In the end, the price chart – “Mr. Market” – dictates the future, where “in the short-run, the market is a voting machine, but in the long-run it is a weighing machine” and market sentiment will ultimately decide. 

•           Technical evidence suggests that although the initial reaction on the JPY, post intervention, was stronger than after previous attempts; the price reversals are becoming less sustainable each time.  Without the compounding backdrop of a key change in the market cycle (mass psychology) and perhaps additional monetary-political support from G-7 governments, any benefits may only prove temporary. 

•           The only lasting currency devaluation this year followed the earthquake in March and consequential multilateral intervention, which served as a double-positive of external influences on the yen. (Note; external event shocks such as natural disasters or political wars, have tended to historically induce major price reversals in markets). 

•           However, a review of Japan’s most recent unilateral interventions in August this year and September 2010 shows it took only 4 and 15 days respectively for USD/JPY to trigger a post intervention retracement (PIR) and new low (PINL). 

•           The fact that each intervention is having a decreased effect over time suggests the credibility of the Bank of Japan’s ability to influence the yen has likely diminished for traders. History also teaches us that virtually all JPY interventions over the last ten years exhibit comparable short-term reversion and timing characteristics.

This is an excerpt from Dec 2011 issue of Forex Journal.