Japanese yen rebounds on BoJ

It has been a busy day for the Japanese yen. The currency came tantalizingly close to the symbolic 130 level earlier today, but then reversed directions. After touching a 20-year high of 129.41, USD/JPY has dropped to 127.93, down 0.71% on the day.

Yen gets some relief from BoJ

The yen finally got a break after a dreadful slide and is in positive territory today. The BoJ came to the rescue, although the central bank wasn’t looking to prop up the yen, but rather to defend its yield curve by capping the 10-year JGB at 0.25%. The yen’s rebound is likely to be temporary, as the main driver for the yen is the US/Japan rate differential, which continues to widen. On Tuesday, the 10-year Treasury yield rose to 2.94%, a new four-year high. Treasury yields are rising while the BoJ is keeping JGBs at low levels, and that is a proven recipe for a USD/JPY upswing. This means that the USD/JPY uptrend should resume and put the 130 line under strong pressure.

The BoJ is determined to keep the 1o-year JGB target in check and has intervened for the second time in just three weeks. The central bank is committed to its ultra-loose policy in order to kick-start the weak economy and is willing to pay the price of a weak yen. But will the BoJ be singing the same tune if USD/JPY barrels above 130? Traditionally, the BoJ has shied away from directly intervening in the currency markets and buying yen, so that scenario is an unlikely one. There’s no question that the BoJ is uneasy about the sharp drop in the yen and officials have been trotting out their usual jawboning about the exchange rate. Still, there may be a USD/JPY ‘line in the sand’ which triggers a move by the central bank, which means that investors should tread carefully with the yen.

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USD/JPY Technical

• There are resistance lines at 1.2837 and 1.3005
• USD/JPY has support at 1.2740. Below, there is 126.32, which is a monthly support line

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