IF: Japanese yen gets the jitters, USD/JPY faces new lows
Dollar-Yen (USD/JPY) continues to search for a new trough despite talks about new monetary easing options in Japan, such as doubling the pace at which the Japanese government purchases JGBs to 100trn yen per year or the possibility of buying as much as 100 per cent of new bond issues.
Both options were offered up by Koichi Hamada, economic advisor to Japan’s Prime Minister Shinzo Abe, and did not come from the Bank of Japan (BOJ).
Hence the muted reaction in USD/JPY which was trading at around 101.55.
The currency pair has slowly been hitting new lows following a large 100 pip drop in barely a three-hour period during Thursday’s US trading session. Until then, the pair had been bouncing off support in the 102.50-102.65 region.
The drop occurred as a wave of risk-off sentiment flowed through the markets on news of escalating tensions in Ukraine, with some reports of Russian military units being deployed.
In tandem, US equities quickly fell by more than a percentage point.
Some unrelated jitters, however, had already hit the Japanese bond market Wednesday night when the BOJ reduced its purchases of JGBs with maturities of more than 10 years. While the reduction was tiny and only a fine-tuning of the central bank’s average maturity of JGB holdings, it resulted in a notable drop in bond prices.
Investors were spooked as the drop revealed the market’s dependency on the central bank, which already buys 70% of newly issued government bonds.
Nonetheless, the blame soon turned on machine-based algorithmic trading or an erroneous order. In any case, the market was vulnerable as a result of the thin-trading volumes.
All-in-all, traders have cause for concern, not least due to the worries of a Chinese slowdown that has weighed over investors all week.
The turn-around in USD/JPY has brought into focus the near four-month low of 100.74. With the Ukrainian conflict far from over, the currency pair could continue to be pressured lower by risk aversion.
According to Axel Rudolph, Analyst for Commerzbank, the current March low at 101.20 is back on the map and further strong support remains to be seen at the 100.77 February trough.
‘Both of these areas are likely to be hit next week with the 200-day moving average at 100.30 then coming into focus. Resistance now comes in between the 38.2% Fibonacci retracement at 102.55 and the February high at 102.83 as well as the mid-January low at 102.85.’
