Watch Out for the Yen

“We will take action in advance, moderately, to avoid drastic reactions. We will adopt a forward-looking approach” states Bank of Japan Governor Fukui.

Boris Schlossberg of Forex Capital Markets says:

Those comments helped propel the yen higher as traders speculated that the central bank may be ready to raise rates before the year end. Although recent economic data from Japan has been relatively lackluster reflecting the overall global slowdown in demand, the country’s unnaturally low interest rate of only 25bp has attracted enormous amounts of carry trade flows against the currency, pushing the EUR/JPY rate above the critically important 150 level. Japanese officials cognizant of the deep discomfort on the part of their European counterparts at the lofty levels of euro against the yen have tried to jawbone the exchange rate lower. Last week Hiroshi Watanabe, Japan’s top FX official stated that there was no reason for yen to weaken further. However Mr. Watanabe’s remarks had little lasting impact on the market as traders dismissed them as mere talk. Tonight’s statement by Governor Fukui appears to be an effort by Japanese officials to finally back their words with action. Should BoJ raise rates before the year end, the yen may rally higher as carry trade liquidation takes hold in earnest.

On the technical side, the USD/JPY (dollar against the yen) is:

• Below yesterday’s low at 117.65
• Price falls into monthly pivot range (117.38 to 118.25)
• Price still below 20 day moving average (118.43)