Profitable traders spend a great deal of time researching and waiting for the perfect market circumstances. The goal of FX News is to give Exness traders a heads-up on coming opportunities not to be missed, and this one is promising to be a key Q4 event.
Yen is fast-becoming the number one currency on trader’s watchlists. There’s talk of a breakout and many traders already have their mouse hovering over the USDJPY “sell” button. Is it just hype, or is there a rapid rise for the yen on the horizon?
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Japan is one of the few countries in the world where interest rates are negative. Currently, the base interest rate, set by the Bank of Japan (BOJ) is -0.1%. Money sitting in deposit accounts with the BOJ is charged interest rather than earning. This base rate is rarely applicable to the average person on the street, but the BOJ is used by commercial banks as a ‘bank of banks’.
The situation is not new, it has been around for decades — ever since the Asian crash in the 90s, which prompted an era of deflation in Japan. The way to combat deflation is to make saving so unattractive that people will go out and spend their money instead, driving up consumption, growth and inflation.
The result of these policies is that Japanese investors have sought more lucrative ways to stash their cash abroad, where base interest rates are higher and offer greater returns. This is what has driven Japanese investors to buy US government debt, or US Treasury Bonds (UST). USTs have historically offered a better rate of return than investments in Japan, and are seen as relatively safe because the US government is unlikely to ever default. Traditionally, the Japanese have composed a high proportion of buyers of US debt, but this relationship now appears to be changing — with quite significant implications for the exchange rate.
The cost of hedging the currency risk on US debt has now reached such a high level that it makes the purchase of USTs unattractive from an investment perspective. The cost of hedging is dictated by short-term funding costs, which are very high in the US. This has led loyal Japanese buyers of US debt to change their buying habits and focus instead on buying the US stock market. They are not the only ones.
During the emerging market crash in August this year, when the Turkish lira plummeted, along with many other major emerging markets (EM) currencies, investors decided en masse they wanted a piece of the American stock market pie. The result was a mass exodus out of EM assets and into the US stock market.
A recent weakness in the US stock market has started to reverse this trend. The risk now for the dollar is that further weakness will result in an exodus from US stocks into whatever is the next attractive investment opportunity — probably gold or other safe-havens such as the yen. The recent weakness in US stocks was triggered by fears about how rising US interest rates are starting to impact the economy, and how trade tariffs are affecting corporate margins.
Analysts have pointed to the mid-term elections and the close proximity of the US debt ceiling as further risk factors for USD. At the current rate of spending, the US government will hit the debt ceiling again in mid-November. If this results in a stand-off between the government and Congress, it is likely to trigger a fall in the US dollar — and possibly the stock market too. With both dollar and stocks falling out of favour at an alarming rate, yen is the perfect fallback.
Recall, Japanese investors segued into stocks from treasuries. If stocks continue to fall, these investors will want to pull their money out and repatriate it to Japan. This will involve selling US dollars and buying Japanese yen, which will push the USDJPY exchange rate lower.
As we can see in the graph below, the USDJPY has already fallen during October 2018 to the level of a key trendline drawn from the March lows. A break below this trendline would be a key deciding moment for the pair — either opening the gates to more downside or leading to a bullish recovery. It is not clear which way things will fall yet, but it is only a matter of time before the scale tips.
A move below the October 26 lows at 111.38 would provide a strong indication of an imminent break. This would green-light a fall to a downside target at 110.30, possibly even lower. The downside targets for the trendline break are calculated using the classical method of taking the move prior to the trendline (labelled ‘a’) and protracting it below the break (‘b’).
The trading world sits ready to take advantage of this movement. By opening an account with Exness, you’ll get immediate and secure access to yen through the MT4 and MT5 trading platforms. Once you’ve got theUSDJPY graph open, wait, be patient, and be ready to make your move.