The yen is getting cheaper again. The USD/JPY pair has reached the boundaries of the 147th figure for the first time since 1998. Bulls have updated the 24-year price high, demonstrating a pronounced upward trend. But despite such unambiguous dynamics, it is not recommended to go buying now. The higher the pair climbs, the riskier long positions look. Suffice it to say that bulls have already crossed the conditional "red line", so the response of the Japanese authorities may follow at any moment. Opening long positions in such conditions is like playing Russian roulette. It is obvious that sooner or later the reaction of the Japanese Ministry of Finance will follow, there is no doubt about it. The only question is when exactly this will happen and how much the USD/JPY pair will then sink.
Let me remind you that in September of this year, the Japanese authorities conducted currency interventions in response to the rapid devaluation of the national currency. According to insider information from Reuters, Japan has spent $25 billion for these purposes. The result was not long in coming: the USD/JPY pair collapsed by more than 500 points in just a few hours – from the 145.90 mark to the middle of the 140th figure. It is noteworthy that back in 1998, during the Asian financial crisis, currency interventions were also carried out after the USD/JPY pair began to approach the 146th figure. This is an important circumstance, given the fact that the price is trading around 146.90.
Can the Japanese government re-react to the devaluation of the yen? The answer is definitely yes. It is possible that the Japanese authorities have somewhat "shifted" the conditional red line higher (approximately to the area of 147.00-147.50), but the fact of a possible reaction cannot be denied. Here it is necessary to recall the very unambiguous rhetoric of the leadership of the Ministry of Finance. In particular, the head of the department, Shunichi Suzuki, recently stated that the authorities are ready to take further actions if necessary to "counter speculative movements of the national currency." His deputy Masato Kanda ("chief currency diplomat") voiced a similar statement, saying that "further actions in the foreign exchange market can be taken any day, including weekends."
I repeat that after the currency intervention in September, USD/JPY dropped sharply by 500 points, but the next day it regained some of the lost positions. Then, for almost two weeks, the pair traded in the range of 142-145 figures. Traders were cautious and did not stay above the target of 145.00. After all, representatives of the Japanese authorities have clearly hinted at the possible consequences of further weakening of the national currency.
But all these peculiar "arrangements" in absentia did not last long. Already at the end of last week, the pair gained a foothold in the area of the 145 figure, and it conquered the next – the 146th - price level.
The sharp rise in the price was due to three main factors. These are the widening divergence of the monetary rates of the Federal Reserve and the Bank of Japan, the release of negative data on the Japanese domestic market and a fairly strong report on the growth of the US producer price index.
BOJ Governor Haruhiko Kuroda once again voiced dovish comments, saying that the central bank will continue easing monetary policy to achieve the two percent inflation target in a "stable and sustainable way." At the same time, he called it "quite appropriate" that the government intervened in the foreign exchange market to support the yen and stop its unilateral decline. After these comments, the USD/JPY pair overcame the mark of 146.50 and headed towards the boundaries of the 147th figure.
Macroeconomic statistics published on Wednesday made it possible for USD/JPY bulls to accelerate the upward movement. In particular, in Japan, the August indicator of basic orders in mechanical engineering was made public. It is a key indicator of investment and a leading indicator of production. The volume decreased by almost 6% - this is a multi-month anti-record.
At the same time, the producer price index was published in the United States, which is an early signal of a change in inflationary trends (or their confirmation). All components of this report came out in the green zone, strengthening the position of the dollar bulls. The overall index rose to 8.5% on an annualized basis, while the core index rose to 5.6% (y/y).
Plus, comments this week were made by prominent Fed officials (who have voting rights on the committee) Lael Brainard and Loretta Mester. They confirmed their hawkish attitude by saying that fighting inflation is the #1 goal. As a result, the probability of a 75-point rate hike at the November Fed meeting rose to 80%.
Nevertheless, despite the very unambiguous fundamental background, it is extremely dangerous to enter longs now. The USD/JPY pair turned out to be at risk: the Japanese authorities can react to the rapid devaluation of the yen at any moment, especially if traders enter the area of the 147th figure. Therefore, at the moment it is advisable to take a wait-and-see position for the pair.