Yen: What Just Happened (and What’s Coming)?

The yen has been, of course, on a wild ride lately. But there were some surprise moves yesterday which need some explaining, since they could shed some light on whether or not the USDJPY has hit a ceiling. There are some important implications for the future of the yen, and something traders need to be very careful about (hint: make sure stops are in place).

The lead-up

The yen has been weakening generally because the BOJ isn’t raising rates while other central banks are. The BOJ isn’t likely to raise rates in the foreseeable future, which makes the currency ripe for carry trading. On Tuesday, the USDJPY spiked higher after US CPI figures came out, because of speculation of an even stronger move by the Fed at the upcoming meeting.

After the data, through the rest of the session, the pair drifted higher until it hit the 144.90 level, and then pulled back. That’s when currency watchers noted that the BOJ had conducted a “rate check”, and further announced a “doorstop” statement later in the day. The pair then pulled back rather dramatically, dropping over 180 pips in the course of a few hours.

What is a “rate check”?

The important thing isn’t the check itself, but that it’s something the BOJ does before it intervenes in the currency. Basically, the BOJ calls around to different banks asking what the exchange rate is. Presumably this is in preparation to take action, or to warn Japanese banks that action is likely.

That’s why there was a reaction, but not a major move in the currency just yet. That it happened just as the pair was about to hit the 145.00 somewhat implies that’s the level Japanese authorities will hold the line. That doesn’t mean the market won’t go above it marginally, or for brief periods. In fact, it would be expected that the market would “test” Japanese authorities to see if they actually will go through with intervention.

What does intervention mean?

It’s been a couple of decades since the last time the currency pair moved up to similar levels, prompting a response from authorities. In that case, the pair got up to 147.00 and there was joint action from the US and Japan.

The BOJ does conduct the operation, but it’s at the direction of the Ministry of Finance, who “pay” for the move. Basically, the BOJ will buy yen on the market in a very large volume, enough to push the exchange rate down by several thousand pips all at once. The move is not pre-announced, and can happen more than once. The idea is precisely to keep the market from trying to push the pair up by “burning” out many of the long positions, and threatening to repeat at any moment.

That’s why if you are trading with yen pairs over the next several weeks, as the USDJPY remains close to the 145.00, it’s a very good idea to make sure your stops are in place and your portfolio is ready for a sudden, large move in the currency. But, remember, if the market behaves as the BOJ and MOF expect, then it’s also quite possible that no intervention happens.

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