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Where next for the Japanese Yen

One of the interesting currency pairs to watch and trade in global forex markets last year was the USD/JPY, always a tricky pair, and made even more difficult by intervention from the Bank of Japan which was both overt and signalled to the market, as the central bank became increasingly concerned at the relentless progress of the Yen against the US dollar, along with other major currencies. The reason for this is simple, in that Japan, like Germany has an economy built on exports, and as such the Bank of Japan has the delicate task of balancing currency valuation against export sales. Throughout 2010, the rise of the yen was relentless, starting the year with one USD purchasing 92.58 yen, and ending the year at just 81.25 yen, a huge move and one which caused consternation within the BOJ. The reason is simple, the stronger that the Japanese yen becomes, then the more expensive are it’s exports to overseas buyers, with the potential to damage the fragile economic recovery now taking place around the world, with major exporting nations such as Germany and Japan leading the way.

Whilst the BOJ has publicly stated that it does not intervene to ‘manage’ its currency, privately this is not the case, and in the final quarter of 2010, we saw the BOJ step in on the 15th September as the USD/JPY hit a low of 82.87 intraday, sending the pair surging higher to close the session at 85.77. All this cost and effort was fruitless as the markets simply absorbed the move and returned to their previous trend, moving back to this level and lower by the end of the year. At present the pair are consolidating between 81 and 84, and any technical breach of the upper price level, could provide a platform of support for a rally higher, although at present the recent short term rise appears to have run into resistance at the 40 day moving average on the daily chart as we trade at 82.93 at the time of writing.

However, this problem is not new, and indeed has been ongoing since 1975, when a US dollar would have bought almost 300 yen, which compares to today’s 80 yen, and indeed this is one of the prime reasons that the Japanese yen has continued to remain a currency with safe haven status, in much the same way as for the dollar, which makes trading this pair difficult, as it is not simply a question of dollar weakness converting to yen strength and visa versa. In order to try to combat this, the BOJ has kept interest rates artificially low following the bubble which burst in the early 1990’s, a scenario that has many parallels with today’s global problems around the world. Even so, the yen continues to strengthen, and there is little that the BOJ can now, do except stand aside, watch, hope and pray that at some point the markets will reverse this long trend, and remove the pressure from an increasingly strong currency.