Japan Fires the Next Shot in the Currency Intervention War
Friday, August 5, 2011
If history is any guide, the continued intervention in the Forex market by the Bank of Japan ("BOJ") will not be successful in the long run. Some traders who expect the Yen to once again test the highs vs. the US Dollar may wish to explore a diagonal spread in Yen futures options. For example, with the Sep Yen trading at 1.2675 and the December Yen trading at 1.12687 as of this writing, the October Yen 1.3200 call could be bought and the September Yen 1.3000 call sold for about 0.0010, or $125 per spread, not including commissions. The hope of traders holding this spread is for the Yen to slowly move higher but remain below 1.3000 at the September option expiration approximately one month from now. At that point, traders would want the October option to gain on the September option, so they could either close-out the trade or hold onto the October option in hopes that the Yen would continue to increase in value.
Fundamentals
Having been given some cover from the Swiss National Bank, the BOJ intervened in the Forex market overnight, selling an estimated 1-trillion Yen to help stop the currency's surge in value. The strengthening Yen has been a major challenge for the country's struggling economy, as a strong Yen makes the country's exports more expensive for foreign buyers which has dramatically hurt corporate profits. In addition to the currency intervention, the BOJ also announced that it would continue its purchases of financial assets, such as corporate and government debt, to help keep down interest rates. The intervention caused the value of the Japanese Yen vs. the US Dollar to fall by nearly 4% at its peak, with the September Yen futures falling below 1.2500 before rebounding at the start of US trading. Although the BOJ hinted that further action may be taken, many traders still remember the market's reaction to the last BOJ intervention following the devastating earthquake back in March. The Yen fell sharply following the intervention, and then traded lower for the next couple of weeks before moving steadily higher as traders moved funds back into the Yen and the Swiss Franc due to concerns about the viability of the Eurocurrency and the uncontrollable budget deficits in the US, which made these two leading currencies unattractive to global investors. The Yen's decline may be even more short-lived this time around, if this morning's US Non-farm payrolls report does not live-up to traders' expectations. Current estimates are for a gain of 75,000 jobs in July, up from the meager 18,000 jobs gain in June. The unemployment rate is expected to remain steady at 9.2%. Should the payrolls figures come in lower than expected, we may see traders rush back into the Yen and the Swiss Franc, much to the dismay of BOJ and SNB officials.
Technical Notes
Looking at the daily continuation chart for the Japanese Yen futures, we notice the brutal sell-off on Thursday, as the BOJ aggressively sold Yen vs. the USD. However, the session ended with the Yen well off the day's lows, as continued uncertainty in the global economy spurred some buying back into the Yen at much more favorable levels than in prior trading sessions. The 14-day RSI dropped sharply in one session, moving from an overbought reading just over 77 to a neutral level currently just under 50. Even given the 4% decline in the Yen, the market did not touch the uptrend line drawn from the April low, which signals that he current up-move is actually still intact. Major support is seen at the 200-day moving average currently near the 1.2250 area, with resistance seen around the 1.2820 level.
Mike Zarembski, Senior Commodity Analyst
