The decline of the Japanese Yen continues. For our readers who do trade the Forex markets, this has been a very profitable trade for us.
I provided readers with an explanation on why the Japanese Yen was going to crater back in April 2022. In fact, I am one of those Dollar Milkshake guys, and believe the US dollar is going to smackdown all other fiats. This is coming true with recent price action in the British Pound and the Euro.
The Bank of Japan doubled down on its dovish monetary policy in April when it began purchasing unlimited 10 year Japanese Government Bonds (JGBs) at 0.25% everyday through fixed-rate purchase operations. Printing Yen to buy bonds to keep yields from rising. While most of the world began tightening and raising interest rates. From a perspective of interest rates differentials, you can see why the Yen would weaken. As a currency trader, why hold the Yen when you can hold other currencies yielding more? As a trader, you can even make a positive overnight interest swap just by going long any currency versus the Yen.
My explanation on why Japan is so important can be viewed in the video above. However, there has been one major change since then.
The Bank of Japan did a currency intervention to strengthen the Yen. The first time since 1998. This means that the Bank of Japan had to sell off foreign reserves and buy Yen. The major thing about this is the Bank of Japan did this without US support. The Bank of Japan did ask the US Treasury a few months before the currency intervention but that was denied.
Now, the Bank of Japan is threatening to ramp up intervention threats with USDJPY breaking above the key 150 level. The lowest levels since August 1990. This is really all Japan has left. The other option would be to increase interest rates to support the Yen but the Bank of Japan won’t do this. It would be a huge shockwave to the financial system given how much Japanese money is used to buy higher yielding debt overseas.
Although Japan can’t do this, I would not be surprised if the Bank of England is forced to raise rates with a surprise hike if the British Pound falls near or below parity (1.00).
A lot of eyes and ears will be on the Bank of Japan policy meeting next week. After announcing unlimited bond purchasing power and the first round of currency intervention, what will a stronger intervention look like? The best case scenario for Japan is for all other central banks to suddenly pivot and start talking about lowering interest rates.
I have had to zoom out on the monthly chart just to show you the next technical levels I see USDJPY hitting. I am looking at the 160 zone. If that breaks… then 180 and 200.
The Yen isn’t just losing value against the US Dollar, but pretty much every currency. Here are a few charts above of the Yen paired with the Euro, the British Pound and the New Zealand Dollar. The drop in the charts (Yen strength) you see is from the Bank of Japan currency intervention. But as you can see, it hasn’t done much. Traders just bought the dip and the Yen is weaker against these currencies than it was before the intervention.
Will the Bank of Japan allow the Yen to weaken in order to prevent yields from spiking? I am thinking about trade. Japan needs to import a lot of commodities. Commodities are traded in US dollars. Japan will now need to pay with more expensive US dollars to import commodities. Perhaps buying Russian energy which can be bought with Rubles and NOT Dollars looks more appealing for Japan. This will apply to all other nations as we see the US dollar continue to run higher.
Japan’s case is different because it is not raising interest rates, but I would say Europe isn’t too far.
The US dollar remains strong and the uptrend is still intact. If the dollar breaks below this uptrend line, it would be a strong pullback sign. However, I would want to see the dollar break below 110 before I can say a longer downtrend is beginning.
The higher the dollar goes, the more pressure it will put on US stock markets and world fiat currencies. The pressure is already being felt as evident by price action on the Euro, British Pound and the Japanese Yen. But buckle up, because this is still the initial stages of dollar strength in my humble opinion.