Successful verbal intervention in Japan
Japan’s Minister of finance Taro Aso said on Monday the officials are ready for currency interventions if the volatile yen will hurt Japanese external trade and economy. This caused significant strengthening of USD/JPY, or made yen weaker against the US dollar. Will such a trend persist?
According to Taro Aso, no matter the yen is getting stronger or weaker. The major concern is to avoid the extreme volatility. As last week yen strengthened against the US dollar to the 18-month high, market participants assumed the possible interventions may be aimed at making yen weaker. On the USD/JPY chart it looks as growth. Stronger yen followed the BoJ decision to take no additional monetary stimulus measures on the Bank’s meeting on April 28. After that the Japanese yen strengthened against the US dollar by 5 yens in 2 days which incurred displeasure of Japanese officials. Last time the Bank of Japan intervened directly only in 2011.
We believe the demand for yen may be induced by the constant current account balance surplus in Japan seen since it was first released in 1996. The external trade balance was also positive since early 1980s till 2011 when it fell into negative. To fight the problem, the Bank of Japan opted for the consecutive interest rate cuts which let the current account balance remain positive. Now the Japanese regulator is avoiding further monetary easing preferring the currency interventions. However, this year the Japanese external trade improved. In February and March its surplus was recorded. The April data will be released on May 22. The Japan’s Q1 GDP will come out in Japan on May 17. The tentative outlook is positive for both indicators which, in our opinion, raises chances for interventions ahead of data.
On the daily chart USD/JPY: D1 is in downtrend. Last week it hit a fresh 18-month low and started correcting upwards. The MACD and Parabolic indicators still give signals to sell. RSI has formed positive divergence and has come close to 50. The Bollinger bands® have widened which means higher volatility. The positive divergence may prove true. The bullish momentum may develop in case the yen surpasses the last fractal high at 108.6. This level may serve the point of entry. The initial risk-limit may be placed below 18-month low and the lower boundary of the descending channel at 105.5. Having opened the pending order we shall move the stop to the next fractal low following the Parabolic and Bollinger signals. Thus, we are changing the probable profit/loss ratio to the breakeven point. The most risk-averse traders may switch to the 4-hour chart after the trade and place there a stop-loss moving it in the direction of the trade. If the price meets the stop-loss level at 105.5 without reaching the order at 108.6, we recommend cancelling the position: the market sustains internal changes which were not taken into account.
Position Buy Buy stop above 108.6 Stop loss below 105.5