Japanese yen in focus following intervention rumours

The yen surprisingly broke a key level of 150 against the dollar this week in what looked suspiciously like an intervention from the Bank of Japan but later came down back to 149.05.

Japan’s central bank has denied interfering in the market, and money flow data has since sustained this. Nevertheless, the BoJ’s action over the coming weeks will be crucial for how the dollar/yen rate plays out.

The dollar yen trade used to be a barometer of risk appetite but now it has shifted into a play on the differential between the interest rates in the two countries.

Until recently the dollar was the weaker link in this play, the weakness of the greenback being a direct reflection of expectation that the Federal Reserve is close to ending its rate rise cycle and rates rising to 5.25% from 0.25% in March last year.

But August and September macro data prompted the Fed to change its signalling, signposting another increase either in November or December, probably by 0.25%. Not only that, but Fed officials also indicated they expected the US economic recovery to proceed at a slow pace, almost close to a flat line, leaving the bank little option but to keep rates high longer than expected.

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US bond market playing a crucial role

In this interplay between currency and bond yields, US bond markets are playing a crucial role. Traders are positioned on the bearish side of bonds, keeping bond yields high. This will indirectly keep a cap on inflation by increasing borrowing costs for both companies and government. At this rate, yields on 10-year Treasuries could keep on rising above the current high of 4.8%, the highest in 16 years, and propping the dollar in the process.

Compare that with the yield on the Japanese ten-year bond of 0.76%, which barely changed. The Bank of Japan is not in the position to change its easy monetary policy while economic growth remains relatively slow while inflation and wages are edging higher. Japan’s aging population and deflationary approach will also work against a change in policy. While the BoJ maintains its rates policy and keeps its overnight policy rate at -0.1% there will be not enough impetus to prop up the yen.

Looking back at the dollar’s rally against the yen on Tuesday, the greenback breached 150 but corrected down below 149 within minutes.

Now that the speculation that the BoJ was behind the correction has been discarded, the most likely explanations is that stop loss selling was triggered above the USD/JPY 150 level. Today the the pair is back at 149.07 with next resistance at 149.10 and then at 149.97. Support levels are at 148.50 and 147.63. The 100 day moving average sits at 148.35 and the 200 day moving average at 147.35.

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