Japanese yen’s rally takes pause

The Japanese yen is almost unchanged on Friday, trading at the 135.00 line.

Lower US yields boost yen

The Japanese yen showed some strength yesterday, gaining around 1% against the dollar. The yen’s improvement was a mechanical response to lower US yields rather than any positive factors related to the yen. Higher US yields have been the driver behind the yen’s sharp descent of around 17% this year. With the Federal Reserve delivering aggressive rate hikes and the BoJ capping the yields on JGBs, the math is simple – as the US/Japan rate differential has widened, USD/JPY has moved higher.

The Bank of Japan is sticking with its ultra-loose policy, insisting that the fragile economy is in need of substantial monetary easing. The BoJ has tenaciously defended its yield curve control, keeping 10% JGB yields capped at 0.25%. This uncompromising stance has sent the yen to its lowest levels since September 1998, raising speculation that the BoJ or Ministry of Finance would intervene to defend the yen. USD/JPY broke above 125.00, then 130.00 and finally 135.00 without any intervention other than some ineffective jawboning expressing Tokyo’s discontent with the rapid deprecation of the yen.

Investors would love to know if there is a “line in the sand” for the yen, which if crossed would trigger currency intervention. There are voices warning that 140.00 is that line in the sand, but I would question that view. USD/JPY has been at much higher levels in the past, and the BoJ has shown that the exchange rate is not a policy target. With the BoJ focused on keeping interest rates at rock-bottom levels, it would be a huge surprise if the BoJ radically changed policy just because the yen fell slightly from its current levels.

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USD/JPY Technical

• There is resistance at 1.3657 and 1.3814
• USD/JPY has support at 1.3404 and 1.3247

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