The currency market has become a very narrow battleground for Tokyo. Japan is now caught between international regulations and its own currency's depreciation. Traders are closely watching the Bank of Japan's every move with suspicion.
KEY DRIVERS AND MARKET SIGNS
Japan is only allowed to conduct two more market intervention sessions until next November. According to IMF guidelines, three days of intervention is considered a single operation. This means Tokyo needs to be very selective before firing its reserve ammunition into the market.
The war between Iran and Israel has further worsened the position of Japan's economy, which is dependent on energy imports. Soaring oil costs have forced the Yen to continue to depreciate against the US dollar. Investors see the intervention as a temporary painkiller rather than a permanent solution.
The interest rate differential between the US and Japan remains the main cause of Yen weakness. As long as the Bank of Japan does not raise rates aggressively, investors will continue to dump the Yen.
MARKET TECHNICAL STRUCTURE
The current bias shows a downward trend in the Yen that shows no sign of ending. The psychological level of 160.00 is the hottest reaction area that everyone is watching. This is the “line in the sand” where Tokyo is expected to act decisively.
If the 157.00 level fails to hold, we may see a rapid rebound towards 160.00. This area is not just a number, but a symbol of economic prestige for the Japanese monetary authorities. Any break above this level will trigger an extraordinary panic in the Asian markets.
MARKET EXPECTATIONS
If Japan decides to use their second intervention bullet at the 160.00 level this week. We will see a brief sharp drop in USDJPY before buyers regain control. The market will take advantage of the “discount” price to continue buying dollars again.
If Tokyo chooses to remain silent for fear of violating the IMF’s “free floating” status. USD/JPY risks flying above the 165.00 level in a very short period of time. This scenario will force investors to seek immediate protection in safe assets such as gold and bonds.
IMPORTANT ‘EVENTS’ COMING
US inflation data (CPI) will be the biggest catalyst for the Yen’s next move. If US inflation remains high, the dollar will continue to mercilessly batter the Yen. This will put Japan in an impossible position to defend their currency.
Follow-up statements from Japanese Finance Minister Satsuki Katayama will also be closely watched. Her words of “bold action” are a clear signal that intervention could happen at any moment. Traders should be prepared for a spike in volatility that could happen in the blink of an eye.
