Is there more gloom in store for the weakening yen?

02 Nov 2023

By Lim Jun Kit, Strategist for Phillip Nova
 
After the BOJ’s announcement of its persistent dovish monetary policy, keeping its short term interest rates at -0.1%, the Japanese yen posted a largest single day drop against the US Dollar since April, which saw the USDJPY rose from 149.02 at the start of the day to hit a high of 151.7. That was a sudden drop of 1.8% or about 2.7 yen in a single trading day.  
 
That also marks the highest point for the USDJPY since a year ago in October 2022 when it spiked as high as above 151.9, and that also happened to be the last time that the Japanese government triggered an intervention in the forex market to prevent the rapid depreciation of the yen. As we speak, the USDJPY has retraced to around 151.2. 
 
Besides from the US dollar, the Japanese yen also depreciated across the board against other major currencies like the Euro, British pound and of course, the Singapore dollar. With Japan being a very popular tourist destination among Singaporeans, this latest movement of the SGDJPY past the 110 barrier will definitely be well received by those who are planning a holiday in Japan soon. 
 
 
Disappointment for the traders
 
Many investors or traders who have long positions in the Japanese yen were anticipating for something more definitive towards the direction of policy normalisation. From what they have announced on Monday, short term interest rates is kept stubbornly below zero as the BOJ is determined to patiently maintain such a policy in order to achieve sustainable inflation above its target of 2%. For some context, Japan has long suffered a sluggish economy and deflation. While its current inflation figures are already above 2%, it is seen as transitory as its influenced by imported inflation and external factors, so it does not actually reflect the health of the Japanese economy. 
 
Despite having tweaked the yield cap to allow its 10 year Japanese government bond yields to float above 1%, which is a minor move, there still seems to be a long way before the BOJ would lift its negative interest rates and normalise the monetary policy, and that, is a disappointing news for the yen investors. 
 
 
Present market trends observed
 
Looking at the economic data, it seems to be leaning towards continued weakness of the Japanese yen and hence it would make sense to sell your Japanese yen holdings if your investment horizon is past this year. On the other hand, if you’re a trader with a shorter time horizon, there are still many layers of resistance up ahead that could make it challenging for the pair to advance higher in the shorter term. 
 
Moreover, from the technical analysis point of view, the chances of the yen rebounding from the current levels has a relatively high possibility and hence going short on the Japanese yen at the moment would be risky and we would advise for traders to be prepared to ride on the retracement move lower for the USDJPY pair. 
 
 
Are we anticipating a government intervention?
 
A forex intervention by the Japanese government is definitely in the cards as the current price levels is very close to where they intervened last October when prices rose sharply to 151.939. Within the span of the same day, the pair whipsawed to a low of 146.2. 
 
Just yesterday morning, we saw reports that the Chief FX Official of Japan warn the markets that they are on standby to intervene if needed. When it comes to FX interventions, what the central bank is concerned about is one-sided and sudden moves in the yen. At the time of writing, the USDJPY seems to have retraced but when we start seeing another sharp spike, that may open the door for the BOJ to intervene. 
 
 
Impact of a possible intervention
 
The foreign exchange intervention is conducted by the Bank of Japan under the instructions of the Minister of Finance and it is with the intention to stabilise the Japanese yen in the event of excessive fluctuations in the exchange rates. 
 
Essentially what it means when the BOJ does a FX intervention is that they would sell a large amount of US dollars against the yen in the forex market to save the yen against rapid depreciation. Typically, these operations are done without prior notice and when it happens, the yen would rise sharply and it will be highly volatile. The previous two times the BOJ intervened in Sept and Oct last year, the USDJPY whipsawed within a range of about 5.6 yen within a day. That’s quite a risky event as traders in leveraged positions could easily be knocked out when their stop losses are hit, triggering losses. 
 
We will not know if the BOJ had intervened until the Ministry of Finance, at the end of every month, publishes details of interventions, if any, on their website. Interventions do not change the course of the currency movement, rather it can only stablise the currency and prevent it from moving too violently in a short period of time. 
 
 
Outlook for the USDJPY
 
The strength of the Japanese yen largely hinges on the movement of the US Dollar. This is because one of the fundamental drivers for the weak yen against the greenback is the large yield differential between the two currencies. With the USD offering a much higher yield, the incentive for investors to pile their cash in USD assets is far higher than holding the Japanese yen assets. So, the fundamentals points towards a weaker yen into next year. 
 
However, in the meantime, technical analysis suggests that despite being in a general uptrend since start of the year, there is room for the USDJPY to retrace lower from the current levels before it resumes on its large uptrend. One of the clues is the bearish divergence on the Relative Strength Index (RSI) indicator that hints of the weakening bullish momentum for the USD against the yen. Additionally, the USDJPY had been forming a rising wedge, since September, which often hints at a reversal to the downside as low as the 148 zone. 
 
In other words, we think there is room for the yen to rebound in the coming month before resuming on the downtrend against the dollar.  
 
 
Other market events to look out for
 
On Friday, there is also a series of labour market data release from the US, including reports like Average Hourly Earnings, Nonfarm Payrolls and Unemployment Rates. Besides, we also have the Purchasing Managers Index (PMI) data. 
 
Next week: China trade data and inflation data, Aus IR statement, EU Retail Sales, US Michigan Consumer Sentiment Index. 

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