Japan Keeps Fighting the US Printing Press
After much alarm sounding but being ignored by the market, as USD/JPY was pushed all the way down below 75.575, Bank of Japan finally intervened on Asia's monday morning to stem Yen's rising strength. In a matter of minutes, USD/JPY surged past 78 and proceeded to top out 79.5 before settling back. Then, for an hour, it stayed flat-lined at 79.2, prompting speculation that BOJ might be tying Yen to that level, just like the Swiss National Bank tied Swiss Franc to Euro at 1.2. However, that level did not hold, and USD/JPY is now trading around 78.00.
While traders were certainly scared for the moment, many people already starting to doubt the lasting effect of this intervention. Given how Yen started strengthening less than a month after its first intervention after the March tsunami, and then again strengthened only a few days afterwards following its August intervention, traders were not paying much respect to the Bank of Japan. Also, this time BOJ was acting alone in the intervention, and it is doubtful how far they can go without support by other central banks.
Of course, the biggest reason for Yen's strength, as Japan's finance minister blamed, was due to speculation and not the fundamental on Japan's economy. However, the speculation was not really on Yen, but the weakness of the US dollar due to the persistent effort by the bi-winning Fed to destroy its currency, the latest being the rumor of an upcoming QE3. Even though BOJ had been running its own printing press for years, it's no match for the US when it comes to printing money. Now that the other safe haven to hedge against a falling US dollar, Swiss Franc, is tied to the Euro, which is rapidly losing its luster, and so is the british Pound, Yen is the only major currency liquid enough to hedge against the falling dollar.
With the G20 summit coming up, there are a lot of issues to be discussed, mostly centered around Europe's woes, Yen's strengthening problem for Japan is unlikely to be getting much attention. Until the US signals that it will stop its printing press (at least temporarily), it's hard to be too bullish on USD/HPY. With that said, sudden spurt of USD/JPY is certainly possible if BOJ is really determined to fight Yen's strength. The best option may be to buy options on the currency pair, or trade only for the very short term.
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