Japanese Takes Intervention Off Table

After sitting inside of a range for six days while waiting for a decision from the Japanese government and the Bank of Japan regarding a possible intervention, the USD JPY finally broke to a new low for the year. Volatility which had been compressed while the market remained inside the range expanded.

After sitting inside of a range for six days while waiting for a decision from the Japanese government and the Bank of Japan regarding a possible intervention, the USD JPY finally broke to a new low for the year. Volatility which had been compressed while the market remained inside the range expanded.

Traders ignored strong words from Japanese Finance Minister Yoshihiko Noda sending a signal that they believe the Japanese government and the Bank of Japan were not ready to back up those words with direct market action.

Noda said at a new conference that the recent moves in the Japanese Yen are clearly one-sided and that disorderly moves can be harmful to economic stability. In the recent past traders would have responded to this “verbal intervention” by covering short Dollar/Yen positions, but this time, having heard this language before, decided to ignore the comments and react to growing global demand for safer lower-yielding assets instead.

This morning the markets are reacting as if it is business as usual. Investors are shedding risky assets and placing the proceeds into the lower yielding Japanese Yen for safe-keeping. This is driving the Yen higher. There doesn’t seem to be any disruptive trading or overt speculation at this time. This is probably frustrating to Japanese officials who seem to believe that there is disorder in the markets.

While it may be true that the high priced Yen can have a detrimental effect on the economy, nothing is going to stop the decline if investor sentiment is triggering a shift out of risky assets.

Japan has not intervened in the currency markets since 2004. At that time it sold 35 trillion Yen in 15 months through March 2004. The markets today are a little more sophisticated. Institutions and hedge funds have the power to combat a central bank’s intervention which is probably why Japanese officials are hesitant at this time to make such a move.

If Japan intervenes and the market absorbs the great influx of Yen supply then the action will have no long-term effect on valuation and only serve to put more Yen into the open market.

Another reason why a successful intervention is not likely at this time, is that in order to work, an intervention has to have the cooperation of other central banks. With all nations seemingly battling economic woes of their own, this cooperation doesn’t seem forthcoming at this time.

Technically, the USD JPY main trend is down. The trend will change to up on a move through 85.91, but this seems unlikely at this time since the old bottoms at 84.73 and 84.89 are likely to become new resistance and limit gains.

James A. Hyerczyk has been actively involved in the futures markets since 1982. He has worked in various capacities within the futures industry from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis. His firm, J.A.H. Research and Trading publishes The Forex Pattern Price Time Report... More

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