Japanese Yen Succumbs to BOJ Wishes

It is no secret that the monetary authorities, as well as the political leaders of Japan, want to see a weaker Yen. The current Japanese leadership is desperately trying to stave off a deflationary wave that has held the nation in its iron-fisted grip now for what seems like an eternity.

The entire idea behind the attempts to take their currency lower on the crosses is to ramp up inflationary pressures associated with a falling currency ( that is a subject matter that requires a post of its own ) and to somehow turn the Velocity of Money higher by getting people to spend now and incur more debt now rather than wait for lower prices to spend later.

The Yen is therefore one of those LONG TERM macro trades that many hedge funds are interested in playing ( much to the delight of the Japanese leaders). It has however been an extremely difficult trade at times to remain in if one is short simply because the Yen can experience some violently sharp rallies anytime there is a rush away from risk and into safe havens.

With ultra-low interest rates in place as far as the eye can see, and with a clear signal from the authorities there in Japan, the temptation to use the Yen as a funding currency for a highly leveraged CARRY TRADE is just too great to pass up by some very powerful speculators.

However this huge macro trade will see very swift reversals whenever FEAR RISES or equities plunge. The size and scope of those carry trades is enormous but the fact that they are heavily leveraged means that losses can quickly accrue if the leveraged positions move the other way. As a result, one will see the yen shoot up rapidly when stocks are selling off. That is simply the sign that the carry trade is being unwound during that time period.

For the trader who is interested in catching a trend, this currency is one that looks to be firming up and asserting itself once more but one must understand , and be prepared, that any of these "risk aversion" episodes can punish you quite severely.  It is therefore not for the faint of heart nor for the poorly capitalized trader.

I have noted some technically significant levels on the long term monthly chart. As you can see, the Yen has plunged rather dramatically the long two months and has begun the trading month of November down sharply as well. But look at the big spike it made in last month's trade before closing out on the lows last week. It was a 500 point move ( please note I am using CME reporting and not the usual Forex reporting and I have dropped out the decimals). That is very tricky to sit through if you are short and are watching "your life passing in front of your eyes" type short covering rallies.

The plunge in September took it down through chart support which was followed by a rally back up to that broken support level ( that then served as resistance) followed by a plunge lower. As you can see on the chart, the Yen can make some rather steep, unidirectional moves at times so the idea of "overbought" or "oversold" are not especially applicable when it comes to this currency.

Here is the one of the things to note about this - the Yen comprises almost 14% of the weighting of the USDX. While obviously not near as great a weighting as the Euro, continued weakness in the Yen does tend to feed into the current trend of a stronger Dollar.

A stronger Dollar here in the US tends to have a deflationary impact on commodities and serves to keep inflation at bay. I said all this to say that a weaker yen may very well tend to feed weaker gold prices here in the US.