JPY Breaks 83: Time for Intervention?

Prime Minister Kan won the elections last night and Yen traders have interpreted his victory to mean a more relaxed approach towards intervention. This may be true when compared to the pro-intervention stance of Ozawa (his challenger) but the rapid appreciation in the Yen against the U.S. dollar AND the Chinese Yuan has also made Kan more likely to intervene in the currency. Even if he was not actively considering physical intervention to weaken the Yen before the elections, he will have warmed to idea when he wakes up in the morning and finds USD/JPY trading below 83.

Yen Strong Against the Dollar and Yuan

Although we are all focusing on the USD/JPY rate, which is trading at its weakest level since April 1995, the Yen is also trading at a record high against the Chinese Yuan despite the fact that Yuan has reached a record high against the U.S. dollar. The recent strength of the Yuan increases the pressure on Japanese government to intervene in the Yen because it reduces the competitiveness of products made in Japanese over China.

USD/JPY Tracking Yields

USD/JPY is also breaking down because U.S. yields continue to fall. Goldman Sachs made the bold call this morning that the Fed could announce additional asset purchases in November and it is having a significant impact on the financial markets. The retail sales number also failed to make U.S. investors more optimistic about the recovery.

At this point there is no major support in USD/JPY until its record low of 79.75.

Time for Intervention?

However I don’t think that the Japanese government will let USD/JPY fall to its record low of 79.75 without intervening. I have been skeptical of calls for intervention since July when USD/JPY fell from 88 down to 83.00. However, everyone has a bottom line, or a point at which they will eventually cry uncle, and for Japan, this level should be around 80, right above the currency pair’s 15-year low. Never before had the Japanese government let USD/JPY fall below 79.75, which was not only the April 1995 low, but also the record low. Now that USD/JPY has fallen below 83, the risk of intervention has increased ten fold and I expect that we’ll go from empty threats to a real battle against yen strength. USD/JPY has now entered the intervention territory which is between 82 and 79.75 and the Bank of Japan could come into the market at anytime. Anyone who is long the Yen needs to be very careful.

The latest CFTC data shows that long yen positions are near record highs, which is exactly what the BoJ likes to see before they intervene in the currency because it provides the best bang for the buck as the stopping out of these short positions will exacerbate the rally in USD/JPY.

Bank of Japan Stepping it Up?

Is the Bank of Japan stepping things up? In a very unusual move, BoJ Governor Shirakawa said earlier today:

“There are substantial fluctuations in the foreign exchange and stock markets mainly against the backdrop of growing uncertainty about the outlook for the U.S economy. The Bank of Japan will carefully monitor such developments and their effects on Japan’s economy”.

Update on USDJPY and US Yields

Yields on short-term US Treasury debt have fallen to the lowest in history on mounting expectations of extra stimulus from the Federal Reserve. USD/JPY has been doing nothing but tracking yields which means that until yields bottom, USD/JPY will remain under pressure. I’ve been talking about this for weeks now – here’s an updated chart. If you want to forecast where USD/JPY is headed, just watch how yields respond to payrolls