Political uncertainly, coupled with the highest public debt level on the OECD, could turn the yen into the next “euro.” And if current Finance Minister Naoto Kan, who has been vocally in favor of a weaker yen in addition to being a strong advocate of the BOJ taking more actions to combat deflation (quantitative easing aka printing money), becomes the new prime minister, markets may run with this and take the yen lower.
We’re already seeing the beginnings of this move; after hitting a low of 87.96 during the May 6 insanity on Wall Street, USD/JPY crossed the 61.8 Fibonacci retracement level and was trading at 92.62 heading into the NY open on June 3.
The option market is also giving clues indicating that further appreciation is likely for USD/JPY. Volatility is trending lower after rising above 16.5% on May 20, with 3 month implied volatility now near 13.5%. Investors were paying as much as 4% more for yen calls over yen puts on May 21, the highest since last July. As of June 2, the measure had fallen to 2.8% and was being further reduced. Investors buy calls when they believe price for the underlying asset will rise and a falling premium for calls over puts indicates that traders are becoming more bearish.
Han may have gotten a dose of fiscal religion after attending the last G 20 summit, where the European Sovereign Debt Crisis was the lead topic of discussion. Japan’s public debt is nearly 200% of GDP but recent economic reports have shown that the job market is worsening and that deflation is again rearing its ugly head, which indicates that if Japan does apply a measure of austerity it will need to be accompanied by a depreciating currency in order to boost exports.
In looking at the chart, I would look to buy USD/JPY on a pullback to the 61.8 level on 92.37. If price failed to hold there, I would look to buy again at the 50 and then again at the 38.2. The 80.9 level would be my first objective with an eventual move to the 95 area, where I would close and then look for either another retrace or a move above and then a test of support.
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