Yen May Have More Surprises in Store for Bulls and Bears Alike

(Bloomberg) -- When it comes to the yen, better fasten your seatbelt.

The dollar is on the verge of breaking an all-important technical support level versus the Japanese currency, which may only be the beginning of a sustained period of volatility in the yen as the market comes to terms with its latest strength.

Yen bulls embraced turbulence in global stock markets as the currency rallied almost 3 percent on a trade-weighted basis since Feb. 2. Still, its status as a haven currency doesn’t fully explain the recent rally.

Yen May Have More Surprises in Store for Bulls and Bears Alike

Speculation mounts among the trading community that the Bank of Japan, even with Haruhiko Kuroda serving another term as governor, will need to scale back its stimulus as there are limits to its expansionary policy.

Add to that a White House administration that feels comfortable, if not advocates, a weaker dollar policy to attract foreign investment through a widening of fiscal deficits, and the recipe for a stronger yen is there.

Interbank accounts are not as long the yen as they would have hoped to be, while real-money names have only recently begun piling up exposure, according to traders in London and Europe, who asked not to be identified because they are not authorized to speak publicly.

Option Demand

Evidence that the market doesn’t have the long-yen trade in the spot market isn’t only shown by price action post the break of 108.00 support, but also by increased demand for option structures that benefit from large fluctuations in the pair.

Repatriation of funds as Japan’s fiscal year draws to a close is also expected to support the yen. Looking back at dollar-yen seasonality though, there is no clear pattern that these flows dictate price action, as the pair has usually gained in March over the past decade. 

Should we get a strong U.S. inflation print Wednesday, or a reversal of the latest stock market rout, and all those haven-yen longs might need to rush for the exit. And do it so in the same way they entered the market: fast, chasing technical breaks, and not looking back.

  • NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

©2018 Bloomberg L.P.

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