Yen. Image Source: Pixabay

• The JPY trend continued into Friday trade at which point a massive counter-trend move wiped away the entirety of the week’s gain in USD/JPY.
• The reversal move was driven by intervention from the Bank of Japan and the Ministry of Finance, as confirmed later in Friday’s session. The big question now is whether we’ll see a repeat of what happened in September.
• As discussed just after the late-September BoJ intervention – this does not change the fundamental backdrop, in which the carry is still tilted to the long side of USD/JPY, EUR/JPY and GBP/JPY. The forecast will remain at bearish for the Yen.

It was a wild week in the Japanese Yen with much of the excitement confined to Friday…

The core issue is one of divergence: With much of the world lifting rates and looking to ward off inflation, Japanese monetary policy remains loose and passive, continuing with negative rates. So as higher rates price-in the US or the UK or Europe, the motivation to get long USD/JPY, GBP/JPY or EUR/JPY also increases on the basis of the greater rate divergence. As rates continue to spread between Japan and everywhere else, the amount of rollover or swap earned for holding the position also increases and this has a tendency to drive bullish activity as investors look to get the new higher rate of return.

This is the carry trade, which is pretty standard in FX as a play-off of rate divergence; but its rarely as stark as what’s showing around the Japanese Yen. And when it’s at work, its beautiful, such as we’ve seen in USD/JPY this year. There’s higher rollover or swap payments for holding the pair and as others jump in, prices move-higher so the trader has the opportunity to pocket not only the higher rollover payments but the higher prices in the pair as a bullish trend drives higher-highs and higher-lows.

This also highlights a number of interesting opportunities from a financial engineering perspective; but that can only serve to amplify the matter as this glaring divergence is an obvious driver of prices and, in-turn, market behaviors.

So from a technical perspective much that’s priced in JPY has been blown-out and overbought for some time. But, the fundamental drive behind the matter has remained the same and it really seems as though the Bank of Japan has no intention of changing that, near-term. And even if they could, there’s risk there, as well, considering the size of the portfolio that’s been accumulated over a decade of heavy intervention, where the BoJ has already bought the bulk of the Japanese Government Bond market along with a massive portfolio of global equity ETFs.

Kuroda had even said that he didn’t foresee any changes to forward guidance for ‘two to three years’ at the last BoJ meeting, even with inflation in Japan pushing up to 30-year-highs. That was read as a green light from traders to bid USD/JPY above the 145.00 psychological level, which created a fresh 24-year-high in USD/JPY.

But, later that night, around the European open, the Ministry of Finance ordered the Bank of Japan to intervene and that led to a five-hour retracement that saw a little more than 550 pips erased from the USD/JPY spot price. This likely stopped out a number of retail traders along the way. But, as I warned just after, nothing changed the backdrop and the long side of the pair was still being encouraged by that rate divergence.

It took only a couple of days for price to recover the bulk of that sell-off, and a week later or two weeks after the intervention, USD/JPY bulls pushed back above the 145.00 psychological level again; and just continued to push, with 12 consecutive daily gains until this Friday’s move.

USD/JPY Daily Price Chart

Chart prepared by James Stanley; USD/JPY on Tradingview

BoJ Intervention

There’s been various comments around the matter, as recently as a couple of days ago, when Japanese Finance Minister Shunichi Suzuki warned that Japan would take action against speculator-driven price moves. The exact quote was, ‘there’s absolutely no change to our stance that we’ll respond appropriately against excessive moves,’ with a later remark that, ‘we’ll be watching markets with a sense of urgency today as well.’

That was before USD/JPY popped above 150.00, which happened on Thursday evening for the first time in more than 32 years. The move really hastened on Friday morning with short-term USD/JPY charts putting in a hockey-stick like move up to 151.95. And at that point, something began to shift…

USD/JPY Four-Hour Chart

Chart prepared by James Stanley; USD/JPY on Tradingview
 

This move was intervention-driven, as confirmed later in Friday’s session by Nikkei. The entire goal of their drive is to keep speculators on their toes, so if looking long on USD/JPY, you are on the other side of them. But, it’s also something that’s being encouraged by their very own monetary policy and as long as rates are negative in Japan and are lifting everywhere else in the world, there will be motive for traders on the long side of the pair. And, as long as that’s there, there’s bullish trend potential.

So, the big question comes down to timing. And for this there’s a few different wrinkles. One must keep in mind that the prior intervention on 9/22 didn’t work out all that well. But, it was basically a one-and-done ordeal that was priced-through in about five hours. Will the BoJ intervene in the same manner here? Or, will they perhaps change tact to keep speculators even more on their toes? This can be done with a theoretical price cap, or a level that they’re actually defending.

There was accusation of such on October 13th, just after the US CPI print. USD/JPY ticked above the prior 24-year high of 147.65 by a couple of pips and then was slammed-down by 125 pips very quickly. So, the execution of that ordeal (whether it was BoJ triggered or not) was like the logic of a sitting stop order, where the order triggered on the price being touched which then unleased a load of liquidity that drove price through multiple levels of liquidity. The BoJ declined to comment as to whether they had intervened there; but the logic of the operation is what’s important as this would set a theoretical line-in-the-sand that would have some element of defense behind it.

Note that I’m not saying that this would work long-term, but it is something else that they can try. And this is something that USD/JPY bulls would need to be on-guard for given the severity of the matter. But, to be clear, it doesn’t really seem all that severe to some Japanese policy-makers as Kuroda has recently opined that JPY weakness isn’t a bad thing for export-heavy Japan. And that echoes his sentiment at the BoJ rate decision in September, with USD/JPY sitting just underneath 145 as he said that he didn’t anticipate any changes to forward guidance for two to three years, even with Japanese inflation pushing up to 30-year highs.

USD/JPY Techs

As I shared at the very beginning of this article, this doesn’t seem to be a normal situation as it’s the fundamental backdrop that’s already created so much contortion. And the pullback was a contortion too, right? Japanese policy-makers used finite FX reserves to make a trade going in the exact opposite direction that their own monetary policy is encouraging. And until that encouragement changes, there’s motivation on the long side of USD/JPY and the short side of the JPY, as the Yen remains one of the most viable funding currencies on Planet Earth.

There’s already a long wick on the daily chart indicating that some have responded by buying the dip. Of course, we cannot rule out another intervention run next week. And there’s risk there, too, as one of those moves can be so violent that it can gap through stops sitting just underneath price action. But, the fundamental drive is still very one-sided.

And this can keep the door open for bullish strategies, with focus on the 150.00 level that now seems to be a new ‘line in the sand.’

USD/JPY Daily Chart

Chart prepared by James Stanley; USD/JPY on Tradingview

EUR/JPY

While the Euro hasn’t been as strong as the US Dollar, it also hasn’t been as weak as the Japanese Yen. Little has, really, but next week puts the Euro in the spotlight ahead of an ECB rate decision. The bank has been trying to ramp up their hawkishness lately and another inflation print coming in at 10% (9.9% technically) will likely motivate them to keep the backdrop as somewhat hawkish for that rate decision next week.

EUR/JPY just traded up to a fresh seven-year-high until the Friday intervention drove a pullback. This can keep the topside of EUR/JPY as an attractive item as the ECB is lifting rates while the BoJ isn’t. For support, 144.04 remains key as this was a prior spot of resistance-turned-support, which is also confluent with a bullish trendline. On the resistance side, there’s a long-term level of interest at 149.27, after which EUR/JPY nears its own test with the 150.00 level.

EUR/JPY Daily Price Chart

Chart prepared by James Stanley; EUR/JPY on Tradingview

GBP/JPY

GBP/JPY has been on a pretty amazing ride of late, combining the tension in UK politics with what’s been showing in Japanese economics. Last month finished as a long-legged doji in GBP/JPY, a sign of extreme indecision. But, that was pushed along by a collapse-like move in the British Pound along with the BoJ intervention in 9/22.

Since then, it’s been mostly recovery as GBP has been clawing back and the pair has been helped along by an extremely weak JPY, eventually leading to a fresh six-year-high in the pair. Price touched the 170.00 level before pulling back late last week, just ahead of the intervention move, which pushed prices back to the 165.00 psychological level, which came in as support.

Similar to the above in EUR/JPY, the door remains open for topside, with focus on resistance potential around the Fibonacci level at 168.06 after which the 170.00 level comes back into view.

GBP/JPY Daily Price Chart

Chart prepared by James Stanley; GBP/JPY on Tradingview