Treat the USDJPY Upside as a Retracement as Long as…
Trading USDJPY lately Is like digging out from an earthquake. The tremors have stopped, damage has been done and the question is what comes next.
Meanwhile, one can make the case that the tumble from 161.93 to a low ar 139.73 was driven by unwinding of carry trades
In this regard, what caught my attention were comments from Japan’s top currency diplomat Atsushi Mimura who said yen
…carry trades built up in the past are likely to have been mostly unwound…
And issued a warning.,,
.. “But if such moves increase again, that could heighten market volatility. We are always watching markets to ensure that does not happen,” Mimura was quoted as saying. (Reuters)
For those not familiar with the term, a carry trade is defined as borrowing in a low interest rate currency to invest in a higher yielding currency (or other financial products).
So, the question is if JPY carry trades have unwound what else would trigger fresh USDJPY selling to drive it to new lows:
1) Lower US interest rates that narrow differentials vs. Japan (so far not having an impact)
2) Safe haven flows (so far rising Middle East tensions have not dented the risk in mood in stocks)
3) Higher Japanese interest rates (only one hike so far)
On the other side, what would give support to keep USDJPY from challenging its low again
1) Cost of holding a low yielding long JPY position, especially when it is consolidating in a range.
2) Covert intervention (very hard to confirm)
3) Resumption of carry trades (haven’t fund traders learned a lesson)
USDJPY Stalemate (two-way risk)
Since bouncing from the low at 139.58, USDJPY has tried to move higher but has so far hit a wall around 144.50. On the other side, only back below 141.73 would out 140 in play again.
Treat the USDJPY Upside as a Retracement as Long as…
So, on one hand the JPY needs to find a fresh source of demand now that carry trades have been unwound.
On the other hand, if there was a fresh run at the USDJPY downside, it could be explained by the global trend for lower interest rates (except in Japan).
To keep it simple, I am looking at it this way…
Treat the USDJPY upside as a retracement as long as it stays below 145.
Here are retracement levels for 161.93-139.45 use our Fibonacci Calculator
Treat the USDJPY Upside as a Retracement as Long as…
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