Duplicity And The Yen

Includes: FXY, UDN, UUP
by: FXstreet

The USD/JPY has been trading in a consolidation pattern for the last three sessions now, and while it briefly pierced the key barrier at 92.00 all three times due to renewed strength of the Japanese yen, it still ultimately lacked the ability to extend the correction further lower. Of course, the key driver behind this recent appreciation of JPY was the acute spike in risk aversion that emanated out of Italy on the heels of a premature electoral outcome, with investors showing once more their preference for the Japanese
safe haven.

… Abenomics vs. reality

The Japanese PM Shinzo Abe has appointed Haruhiko Kuroda to command the Bank of Japan, broadly in line with opinions of the FX community. Furthermore, with this act, Abe concludes what he started to hint at back to the pre-election days in October-November of last year. Now the table is set for the Japanese economy to start its tough battle to finally eradicate the lingering specter of deflation that has been hammering the country over the last two decades.

The appointment of Kuroda - known principally by his dovish stance - would exacerbate the government aspirations of a weaker yen as the preferred path to spark inflation expectations amongst the economic agents, in order to reach the 2.0% target at a later stage.

The yen depreciation has been impressive, both for the nominal levels of the currency and the short period of time that it developed, considering that it was trading in the area around 77.15 against the greenback on September 2012, it weakened to 94.73 at the end of February. This period is well characterized by a 'verbal intervention', adding further selling interest to the yen, and a spiraling risk appetite in the global markets, perfectly combined to fulfil Japanese officials wishes. Reinforcing the above, it is worth noting both pronounced upsides in the euro and the sterling, climbing to multi-month highs against the U.S. dollar, above 1.3700 and almost 1.6400 respectively.

Nowadays, risk appetite trends have been blown by the euro-hostile results in the Italian parliamentary elections, and the dark clouds looming Italy are not only threatening to extend over the rest of the eurozone skies, but they also come to stay for weeks, even months, whatever it takes to discern a more friendly horizon in the Italian peninsula.

Moreover, there still no news regarding the so called U.S. "sequester", which meant to be triggered tomorrow. Both no minor issues represent a source of strength for the U.S. dollar and the Japanese, directly confronting Abe & Co. objectives, at least in the very near term. Another point that possesses the ability to interfere with a weaker yen is the end of the financial year in Japan at the end of March, where repatriation funds would surely increase the buying pressure of JPY.

All in all, the yen remains idle, scratching its head while debating the next direction to follow. After breaching the bottom of the 3-month up-channel around 93.00/10, the 92.00 figure remains the very near term support, where a close below that would then expose the region of 90.55/70, where converge the 23.6% of the Fibonacci retracement of the up-move from September'12 lows to February highs around 94.75 with the 55-day moving average. Further selling interest would expose 89.05 (top of the daily cloud), ahead of the 38.2% retracement at 88.03

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.