Opening longs for USD/JPY now is like playing Russian roulette: the stakes are high, but the consequences can be catastrophic. Nevertheless, judging by the dynamics of the pair, many traders are still playing for an increase, despite the existing risks of retaliatory actions by the Japanese authorities. In my opinion, such boldness of market participants is because they were able to overcome the red line in the form of the 146 mark with impunity. After all, it was this target that became decisive in the issue of currency intervention—both in 1998 and last month.
However, in October, the Japanese authorities actually turned a blind eye to the rapid devaluation of the national currency. To date, the USD/JPY pair is already preparing to storm the 151st level, updating 32-year price highs. And if the Japanese government does not intervene in the situation, then there is no doubt that the buyers of the pair will not only gain a foothold in this price area, but will also swing at the 152nd figure.
Obviously, Japan's Ministry of Finance will sooner or later simply have to respond to the current situation. However, a natural question arises here: why do the Japanese authorities maintain a wait-and-see attitude, "missing" both the 146th level of USD/JPY and the subsequent figures, up to the psychologically significant 150th? In my opinion, this is due to the fact that the September currency intervention essentially ended in failure. The yen, paired with the greenback, strengthened its positions for just a few days, after which it again fell under a wave of sales.
It is worth noting that many experts warned in early September that currency interventions are rarely successful, and if carried out, it will only give a temporary respite for the yen. Actually, this is what happened: after an impulsive 500-point drop to the 140 figure area, the USD/JPY pair reversed 180 degrees and headed up again. And at an accelerated pace: in just a month, the price jumped by 1000 points! Take a look at the daily chart: the pair has been showing a consistent almost no retracement since the end of September.
Naturally, in conditions of such steady growth, the temptation to purchase is very great in order, so to speak, to have time to jump into the last car of the departing train. But in the current situation, this "jump" can be fatal.
First, it is necessary to recall the September statements of the leadership of the Ministry of Finance. In particular, the head of the department (Shunichi Suzuki) said at the end of last month that the authorities were 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."
Secondly, traders should pay attention to the dynamics of inflation in Japan. Just today, data were published indicating that the inflation rate in the country has reached the 3 percent mark. This is primarily due to rising energy prices combined with a record low exchange rate of the national currency. At the same time, most experts say with one voice: the low exchange rate of the yen is unfavorable for the country's economy, since many enterprises have moved production abroad, and prices for imported raw materials are growing at a rapid pace. And this factor is another argument in favor of conducting a round of currency intervention.
The dollar, in turn, continues to gain momentum throughout the market, supporting USD/JPY buyers. The greenback is rising amid growing treasuries and the strengthening of the hawkish mood on the part of the Fed representatives. The 10-year Treasury yield has already hit a 14-year high, while the 2-year yield has risen to its highest since 2007.
US Federal Reserve officials continue to voice hawkish rhetoric. In particular, Philadelphia Fed President Patrick Harker said yesterday that he sees the Fed's interest rate by the end of this year "significantly above four percent." It is obvious that the regulator will increase the rate by 75 basis points in November. There is also a growing likelihood that the Fed will take a similar step in December, at the last meeting of this year. According to the CME FedWatch Tool, the likelihood of this scenario occurring is estimated at 78%.
Meanwhile, the Bank of Japan remains the only central bank that keeps interest rates in the negative area "to support business activity in the country." The divergence of the rates of the central bank quite reasonably pushes the USD/JPY up.
But the higher the pair climbs, the higher the risk of a second round of currency interventions. A sort of Russian roulette in the Japanese way. The fact that "nothing happened" after traders broke 146–147 figures does not mean at all that Japan's Ministry of Finance will sit idly by in the current situation when it comes to the prospects for growth in the 151st price level area. Therefore, despite the obvious attractiveness of long positions, it is extremely risky to open longs in USD/JPY. Considering the Friday factor and the likelihood of retaliatory actions from the Japanese authorities over the weekend, at the moment, it is best to take a wait-and-see attitude for the pair.