The relentless weakness in the Japanese yen continues to push JPY-based crosses to fresh highs, as demonstrated by the recent pronounced ascent of the USD/JPY and EUR/JPY, trading in the proximities of 89.00 and 120.00, respectively.
… It's all about risk
The impressive bearish trend in the yen sparked in mid November, when it was trading in the vicinity of 79.20 against the greenback. Back then, the Japanese elections were looming and the former LDP candidate, now Prime Minister Shinzo Abe was increasing the selling pressure on the yen via a plethora of warnings against the BoJ with a clear target: defeat entrenched deflation. A massive plan of fiscal stimulus was announced last week, and it all points out to a new and higher inflation target of 2.0% to be announced at the next BoJ gathering next week, all against a backdrop of promises of further and bold easing.
Yen bears have found extra support in the late risk rally, ignited last week after the ECB practically ruled out further rate cuts in the very near term, along with positive (?) prospects for the euro zone throughout the present year, encouraging traders to accelerate their outflows from the safe havens.
The yen is navigating extremely oversold levels, despite today's markets bias towards risk aversion. At this juncture, and ahead of the next BoJ monetary policy meeting, market participants should bear in mind how much of this late talk involving a weaker yen is already priced in by the markets, especially if investors take into account the past countless attempts by Japan to curb the deflation, and the ineffectiveness of previous easing cycles. The FX community needs to believe this time is different, and in such case scenario, key resistance levels arise in the horizon against its American counterpart at 90.00, 95.00 and 100.00
Plotting against the actual JPY weakness, we find the upcoming second part of the US 'fiscal cliff', dangerously combined with the debt-ceiling talks, which would give both the USD and the JPY some extra buying pressure. In addition, as the Japanese fiscal year-end gets closer, the usual repatriation of yen flows would surely play its part.
In technical terms, expert Karen Jones at Commerzbank argues "USD/JPY has not quite managed to clear the 89.30 30 year resistance line - we have a 13 count on the daily chart (TD sequential) and divergence of the daily RSI - both warn of likely profit taking here. We would allow for some slippage to 87.17 then the 85.84 2-month uptrend."
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.