Last week saw the USD/JPY collapse in price as the pair broke sharply through support at 110.66 following a broadly negative USD sentiment swing. The swing was largely due to the poor US Goods Orders Results, as well as the ongoing dovishness of the Fed. Subsequently, the USD/JPY experienced waves of selling which saw it close the week down around the 108.00 handle. Subsequently, many within the markets are now wondering if the venerable Japanese central bank will seek to intervene in FX markets.
The response to the recent strengthening of the yen has been typical for the Japanese government and central bank as they attempt a ‘verbal intervention’ to alter the market. This was relatively evident with their comments over the weekend pointing to the fact that the G20 regulations do not prevent a short term currency intervention. However, given much of the current capital flight within the markets, it is unlikely that this will have much in the way of an impact in the current bearish USD sentiment.
Typically, the Bank of Japan would next attempt to alter expectations by undertaking a round of `rate checks’ with FX dealers with the implication that they could possibly be seeking to sell down the yen. However, this rate check is yet to occur but it is highly likely that the coming week might provide just that signal. If in fact the BoJ does move to obtain rate quotes then markets are likely to react aggressively ahead of any potential intervention. Subsequently, the week ahead could see some strong volatility for the yen.
Looking ahead, the pair will likely be facing a critical juncture as there is still plenty of selling pressure that could impact the USD/JPY in the days ahead. In fact, a negative result from either the US CPI or Core Retail Sales could see the pair in free fall once again. However, there are some rumblings that the Bank of Japan is likely to intervene in markets if valuations continue to drop. Despite previous statements to the contrary, the central bank clarified over the weekend that this did not preclude it from acting. Subsequently, it could be a wild week ahead for the pair but look for it to consolidate until something changes the balance.
From a technical perspective, the USD/JPY’s recent fall through the key 110.66 support level has predisposed it to further downside moves. However, our initial bias is neutral for the week given the risk of a sideways consolidation, along with an intervention in the markets by the BoJ. Also, the RSI Oscillator is also strongly oversold which largely predicates a sideways consolidation ahead of a resumption of the bear trend.
Ultimately, the Japanese central bank is likely to keep their powder dry in advance of the need for decisive action. However, there are some significant signals that the beast is stirring and that the week ahead could be decisive for the embattled currency.