Will the Bank of Japan Feel the Pressure to Devalue the Yen?
Fundamentals
Bank of Japan (BOJ) governor Masaaki Shirakawa is in a tough spot. Will he resist the calls from Japanese corporate and government leaders to take decisive actions (such as currency intervention) to stop the rise of the Yen? Or, will he resist the calls for action, hoping to discourage other nations from also intervening in the FX markets to weaken their currencies vs. the flailing U.S. Dollar in order to gain a competitive advantage in exports vs. other nations. On Tuesday, the BOJ board voted to provide YEN 10 trillion in 3-month funds at the current 0.1% rate, as well as YEN 1 trillion into short-term money markets in order to provide ample liquidity to an economy struggling under the weight of a strong Yen. Japanese consumer prices fell by 2.2% in October vs. year ago levels, which marks the eighth consecutive month of falling prices. This is leading some analysts to fear that deflationary pressures will get worse unless something is done to curtail the rising Yen. The BOJ actions were designed to, hopefully, stem the tide of the rising Yen, as it makes a statement to the market that the BOJ will maintain an accommodative monetary policy for some time to come. However, with Vietnam devaluing its currency by 5% last week and China's slow movement to allow the Renminbi to float freely vs. its current peg to the USD, BOJ officials may eventually have no choice but to intervene in the FX markets to stop the Yen's rise, in order to prevent its economy from sliding even further.
Trading Ideas
The Japanese Yen looks to be at a crossroads, with the major trend pointing to a continued rise in the value of the Yen, vs. potential government pressure for the BOJ to take action to materially weaken the Yen to help its export driven corporations. This scenario could lead to a further increase in Yen volatility in the coming months, especially if currency intervention takes place. One possible trading strategy that may perhaps take advantage of an increase in volatility is the purchase of strangles in Yen futures options. An example of such a trade would be buying the February Yen 1.19 calls and the February 1.10 puts. With March Yen futures trading at 1.1476 as of this writing, the February 1.19/1.10 strangle could be purchased for 196 ticks, or $2,450 not including commissions. The premium paid is the maximum risk on the trade, with the trade showing a profit at expiration in February should the March Yen be trading above 1.2096 or below 1.0804.
Technicals
Looking at a daily continuation chart for Yen futures, we notice the market has been in a significant uptrend since yearly lows were made back in early April. Prices remain above both the 20 and 100-day moving averages, which would confirm the current bullish trend. The 14-day RSI has moved out of overbought levels, but is still reading a rather strong 64.99. Taking out the spike above 1.1700 caused by the "flight to liquidity" after the Dubai World debt crisis was announced, resistance is found near the 1.1650 level. Near-term support is seen at the 20-day moving average, currently near the 1.1250 area.
Mike Zarembski, Senior Commodity Analyst
