The Japanese yen has stabilized on Tuesday, after starting the week with sharp losses. USD/JPY is trading at 123.60 in the European session.
Yen flirts with 125 line
The yen took investors on a wild ride on Monday. USD/JPY climbed almost 300 points and broke above the symbolic 125 line for the first time since August 2015 before retreating and closing at 123.90. The yen was hammered after the BoJ rushed to defend its yield target, making an unlimited bid for 10-year JGBs at 0.25%. The bid has been extended until Thursday. The 4-day period is the longest intervention ever by the BoJ, and the move could lead to further losses for the wobbly yen. So far, the intervention hasn’t pushed 10-year yields downwards, as they are currently at 0.25%.
The BoJ has intervened in dramatic fashion so as to keep benchmark yields at an upper limit of 0.25%, as the Bank is committed to maintain a loose policy in order to kickstart the weak economy. This puts the BoJ out of sync with the Federal Reserve and other major central banks which are tightening policy in order to contain re-hot inflation.
The yen has been on a massive slide, with USD/JPY up over 7% in March. The weak yen is exacerbating inflation by making imports more expensive, which could make it difficult for the BoJ to continue trying to cap yields at ultra-low rates. The US/Japan rate differential has been widening, which has been the driver behind the yen’s spectacular slide.
Besides the BoJ, another player that should be monitored is Japan’s Ministry of Finance (MOF). The MOF is uncomfortable with the yen’s sharp downswing, and a BofA note on Monday said that if the yen climbs above 125, the ministry could warn speculators against intervention, while a break above 1.30 could trigger actual intervention by the MOF, according to BofA.
Don’t change channels – things could get very interesting if the yen continues to lose ground.
- 123.32 is a weak support line. Below, there is support at 121.21
- There is resistance at 124.55 and 126.66
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