JPY Breaks 83: Time for Intervention?

2009 japanese yen 2009 japanese yen forecast Currency Intervention forex blog Japanese Yen Kathy Lien

Prime Minister Kan won the elections last night and Yen traders have interpreted his victory to mean a more relaxed approach towards intervention. This may be true when compared to the pro-intervention stance of Ozawa (his challenger) but the rapid appreciation in the Yen against the U.S. dollar AND the Chinese Yuan has also made Kan more likely to intervene in the currency. Even if he was not actively considering physical intervention to weaken the Yen before the elections, he will have warmed to idea when he wakes up in the morning and finds USD/JPY trading below 83.

Yen Strong Against the Dollar and Yuan

Although we are all focusing on the USD/JPY rate, which is trading at its weakest level since April 1995, the Yen is also trading at a record high against the Chinese Yuan despite the fact that Yuan has reached a record high against the U.S. dollar. The recent strength of the Yuan increases the pressure on Japanese government to intervene in the Yen because it reduces the competitiveness of products made in Japanese over China.

USD/JPY Tracking Yields

USD/JPY is also breaking down because U.S. yields continue to fall. Goldman Sachs made the bold call this morning that the Fed could announce additional asset purchases in November and it is having a significant impact on the financial markets. The retail sales number also failed to make U.S. investors more optimistic about the recovery.

At this point there is no major support in USD/JPY until its record low of 79.75.

Time for Intervention?

However I don’t think that the Japanese government will let USD/JPY fall to its record low of 79.75 without intervening. I have been skeptical of calls for intervention since July when USD/JPY fell from 88 down to 83.00. However, everyone has a bottom line, or a point at which they will eventually cry uncle, and for Japan, this level should be around 80, right above the currency pair’s 15-year low. Never before had the Japanese government let USD/JPY fall below 79.75, which was not only the April 1995 low, but also the record low. Now that USD/JPY has fallen below 83, the risk of intervention has increased ten fold and I expect that we’ll go from empty threats to a real battle against yen strength. USD/JPY has now entered the intervention territory which is between 82 and 79.75 and the Bank of Japan could come into the market at anytime. Anyone who is long the Yen needs to be very careful.

The latest CFTC data shows that long yen positions are near record highs, which is exactly what the BoJ likes to see before they intervene in the currency because it provides the best bang for the buck as the stopping out of these short positions will exacerbate the rally in USD/JPY.

Bank of Japan Stepping it Up?

2009 japanese yen 2009 japanese yen forecast Kathy Lien

Is the Bank of Japan stepping things up? In a very unusual move, BoJ Governor Shirakawa said earlier today:

“There are substantial fluctuations in the foreign exchange and stock markets mainly against the backdrop of growing uncertainty about the outlook for the U.S economy. The Bank of Japan will carefully monitor such developments and their effects on Japan’s economy”.

Update on USDJPY and US Yields

2009 japanese yen 2009 japanese yen forecast forex blog Kathy Lien non-farm payrolls

Yields on short-term US Treasury debt have fallen to the lowest in history on mounting expectations of extra stimulus from the Federal Reserve. USD/JPY has been doing nothing but tracking yields which means that until yields bottom, USD/JPY will remain under pressure. I’ve been talking about this for weeks now -- here’s an updated chart. If you want to forecast where USD/JPY is headed, just watch how yields respond to payrolls

How Far Can USD/JPY Fall?

2009 japanese yen 2009 japanese yen forecast 2009 us dollar forecast ECB forex blog Japanese Yen Kathy Lien usd/jpy usd/jpy intervention

The U.S. dollar fell to a 7 month low against the Japanese Yen this morning following another barrage of weak economic data. Consumer prices fell, foreign inflows decreased and the UMich consumer confidence survey dropped to the lowest level since August 2009. On FX360.com, I talked incessantly in my daily report about how the data today was going to be weak and yesterday, I said USD/JPY was going to fall to at least 87. However now that it has broken below that point, the burning question on everyone’s minds is How Much Further Can it Fall?

My updated target is at least 85.00 -- The currency pair’s 14 year low. When USD/JPY reaches that point, expect Bank of Japan officials to cry uncle and attempt to talk down the Yen (and up the dollar). That will most likely create some 2 way risk in USD/JPY and stem the currency’s slide. Yesterday, Shirakawa already warned that they are watching USD/JPY closely.

Enjoy the chart, enjoy the trade.

What Japan Post’s New Deposit Limit Means for JPY

2009 japanese yen 2009 japanese yen forecast forex blog Japanese Yen Kathy Lien

This morning, Japan Post Bank announced plans to double their deposit limit from 10 million to 20 million yen. Japan Post Bank is the country’s largest postal service operator and also its largest financial institution. With financial assets of 300 trillion yen or the equivalent of US$3 trillion, their holdings exceed the entire GDP of France. They are also 1.5 times larger than Mitsubishi UFJ Financial Group, the country’s largest private bank. Therefore as you can imagine, even though the Japanese Yen barely reacted to the announcement, decisions by Japan Post can and will have a long term impact on the financial markets.

Japan Post Could Invest New Deposits in Treasuries

Approximately 75 percent of the funds held by Japan Post are invested in Japanese government bonds. Since their privatization launch in October 2007, they have been looking to diversify the assets collected from postal savings deposits. In the fourth quarter for example, they bought Y300 billion or US$3 billion worth of U.S. Treasuries. Their holdings of foreign securities increased by Y2 trillion over the past year which is large in absolute terms but small compared to Japan Post’s overall holdings. However if Japanese citizens take advantage of the higher deposit limits, Japan Post could find themselves flush with cash and they will in turn be looking for a place to invest. This could create fresh demand for U.S. Treasuries and foreign bonds denominated in euros, yen or any other higher yielding currencies.

Japanese Bankers Call the Decision Unfair

Although Japan Post lifted its official guarantee for deposits, many depositors believe there is still an implicit guarantee since the bank is state owned. As a result, Japanese Bankers have called the expansion unfair because it creates a competitive advantage. The bank’s primary motivation for increasing the deposit is to raise enough funds to operate uniform financial services nationwide but with Y40 trillion yen or US$400 billion in Japan Posts deposits expected to mature this year, the bank may also fear that the country’s aging population will shift their money out of Japan in search for yields. There has already been a sharp increase in demand for foreign currency denominated mutual funds – the holdings of these funds in Japan increased 31 percent in January and 25 percent in February from the prior year. If Japan Post is successful at keeping some of this money at home, there could be less downside pressure on the Yen when the deposits mature.

The Japanese government will also decide on Wednesday whether or not to privatize the bank. In all likelihood, privatization plans will remain on hold. The government will most likely sell a portion of their holdings, which allows them to retain the power to veto any major changes in the bank.

USD/JPY: What is Behind the Sharp Rally

2009 japanese yen 2009 japanese yen forecast Kathy Lien usd/jpy

USD/JPY is on a tear this morning following the better than expected jobless claims report. I think traders are relieved that the deterioration in the labor market can officially be blamed on Mr. Frosty because jobless claims have reverted back to pre-snow storm levels. Although I am worried by the sharp rise in the number of people receiving extended and emergency unemployment benefits, that is clearly not what the market cares about right now.

USD/JPY is trading off U.S. rates (yields) and not stocks. The following chart shows the strong relationship between USD/JPY and the 10 Year U.S. Treasury yield. This relationship holds for shorter term yields as well like the 2 year bond yield

Will DPJ Leadership Have a Lasting Impact on the Yen?

2009 japanese yen 2009 japanese yen forecast hatoyama Kathy Lien

The Japanese Yen strengthened across the board as investors cheer new leadership in Japan. After more than 50 years of unchallenged power, the Liberal Democratic Party (LDP) has been finally defeated by the Democratic Party of Japan (DPJ). The big question of if and when Prime Minister Aso will announce his resignation was answered almost immediately with Aso conceding defeat and confirming that he will resign as LDP head. Mr. Hatoyama, the current leader of the DPJ is expected to be confirmed as the new Prime Minister of Japan in approximately 2 weeks.

Who is Mr. Hatoyama?

Yukio Hatoyama has politics in his blood. His grandfather was the LDP’s first Prime Minister in 1955 and Hatoyama will be the country’s first non-LDP Prime Minister since 1955. He comes from a weathly family that has made their fortune in the industrial and political sectors. He is a fourth generation politician with a Ph.D in engineering from Stanford University. Although Hatoyama inherited his father’s LDP seat in 1986, he has been reelected to that seat seven times.

Some people in the Japanese political circle have called Hatoyama the “alien” as he can come off as eccentric and aloof. The Prime Minister role of Japan has been a difficult one for anyone to hold down for more than a year since Koizumi left office in 2006. As someone who can sound more like a teacher than a politician and has been criticized for being indecisive, Hatoyama has a tall task ahead of him.

The political landscape has changed dramatically for Japan with the DPJ’s victory. As the new party attempts to announce fresh measures aimed at stimulating the economy, there could be political turmoil. The DPJ does not have practical experience running the country and their goals are ambitious. Unlike the LDP whose initiatives have focused on business and public works, the DPJ’s initatives will focus on increasing disposable income for households. The party expects to pay for their new initiatives by cutting wasteful administration costs. Having previously criticized the Japanese economy for being overly dependent on exports, Hatoyama will be focusing heavily on boosting domestic demand.

Political Change Will Not Have a Lasting Impact on the Japanese Yen

However as happy as Japanese investors are about the change in leadership, the positive impact on the Japanese Yen could be limited. Long term trends in USD/JPY are determined by market fundamentals and overall risk appetite and not Japanese politics. With that in mind, USD/JPY is very weak. The sell-off in global equities and thin trading conditions ahead of the U.S. Labor Market holiday could drive the currency pair to a 6 month low of 91.75.

In terms of Hatoyama and the Democratic Party of Japan, it remains to be see whether they have what it takes to deliver on their promises of turning the economy around. If the global economy continues to recover, the DPJ could benefit from having the wind behind their sails. Either way, it will certainty be a daunting task for Hatoyama as the economy and his party’s legacy now rests on his shoulders.

Floor Caving Under USD/JPY?

2009 japanese yen 2009 japanese yen forecast forex blog Forex Technicals Japanese Yen Kathy Lien

The 95 price level for USD/JPY has served as very strong support over the past few months and now that the currency pair is trading well below that price level, it appears that the floor is caving in.

The following chart illustrates the significance of the breakdown. USD/JPY is trading in sell zone, which we determine using Bollinger Bands and the break of the 50% Fibonacci retracement of the January to April rally that took the currency pair from 87 to 101. The 10-day SMA is also crossing into the 200-day SMA suggests that USD/JPY could fall as low as 93.

What is driving the move in USD/JPY?

Yesterday, I posted a chart of the correlation between USD/JPY and U.S. Stocks. The S&P 500 erased its earlier gains and is now trading in negative territory which explains the latest breakdown in the currency pair. Here’s another interesting chart that confirms my belief that USD/JPY is headed lower. Three month LIBOR rates are slipping and USD/JPY has an uncanny way of trailing short term rates.

Yen to Strengthen Further?

2009 japanese yen 2009 japanese yen forecast Japanese Yen Kathy Lien

I am back from vacation and found this interesting tidbit that could lead to further Yen strength over the next few days:

Sumitomo have announced they are looking at doing a rights issue next week (up to USD 8.6 bio equiv) of which 50% will be offered to non domestics. This deal is expected to close on the 16th June and allocations likely to be given on the 17th June settlement T+3.

There could be a lot of interest in this as:

a) real money managers continue to invest generally for low levels
b) Global equity managers are very underweight Japan
c) There is general appetite for financials.

Given real money equity managers do not currency hedge this has the potential to create heavy buying of YEN this week, particularly against the non dollar currencies.

Look out below EURJPY!