The Yen’s Downward Spiral is Finally Too “Difficult to Ignore” for the Bank of Japan
Plus, while our timing on that yen trade was less than favorable, our timing on the QQQ has been absolutely impeccable. Here's an update on our current positions.
The Yen's Downward Spiral is Finally Too "Difficult to Ignore" for the Bank of Japan
Hello all – I'm going to just go straight into a quick overview of all our positions for today's report. Then I'll have more detail on the overall markets and strategy for this month in my Monthly Game Plan for May towards the end of the week (Thursday or Friday).
Let's start with the big news:
Invesco CurrencyShares Japanese Yen Trust (FXY)
We finally got some interesting movement out of the Japanese yen (USD/JPY) at the 160 level.
Note: If USD/JPY is going up, that means the yen is going down. If it's going down, that means the yen is going up. However, the Invesco CurrencyShares Japanese Yen Trust (FXY) essentially measures JPY/USD. It's the same thing, just inverted, essentially.
Today (Monday morning Tokyo time), the USD/JPY hit 160 and then promptly sold off by almost 4% over the course of just the next few hours, erasing 12 days of gains on this currency pair. (That means the yen is going up against the U.S. dollar.)
Source: TradingView
I immediately suspected that this was the intervention I've been looking for. I figured if it was blowing past 155, then 160 HAD to be the line in the sand.
The first murmurings I heard after the move was that Japanese banks were conducting heavy dollar selling for the first time in 18 months.
Also, interestingly, Monday is a public holiday in Japan. They did this on thin trading while most people were distracted.
"The sudden, sharp drop in dollar-yen passes the duck test. If it looks like a duck, swims like a duck, then it probably is a duck. Looks and smells like intervention." Sim Moh Siong, currency strategist at Bank of Singapore, told Reuters.
And then we got confirmation:
Masato Kanda – Vice Minister of Finance for International Affairs at Japan's Finance Ministry – told Wall Street Journal reporters, "It is difficult to ignore the bad effects that these violent and abnormal movements will cause for our nation's economy."
The Wall Street Journal article declares, "Japan intervened to prop up the yen after it hit a multidecade low against the dollar on Monday, people familiar with the matter said."
Our entry was sub-par. We were right on interest rates rising above negative, but price did not react accordingly.
As the yen dropped against the dollar, I was tempted to get out of the trade but felt it was illogical for the Japanese government not to eventually intervene. The thinking was that an intervention would cause such a violent and immediate move in the price – forcing out all previous yen short/dollar longs on this pair – that we'd make up for the lost ground in our bad entry in short order.
Well – a 4% move in a matter of a few short hours is testimony to that.
But it remains to be seen whether this was a one-off thing or if it's going to be a campaign that lasts a few weeks.
One thing is for sure – if you're short the yen right now... what is the safer play? Unwind your position or literally start betting AGAINST the Japanese government's literal (and no longer verbal) actions?
Let's see if the yen begins to rise this week. Hold FXY – your patience may pay off very well on this trade, along with your strong hands.
This is why we practice proper position size and risk management: so we can hold on with conviction during dicey trades even when they move far against us... if we continue to believe the premise behind the trade is valid.
That's it for today – see you later this week on the May Game Plan video.
Do you have any questions or comments or trade ideas you want to share? Make sure to email me at tradecycles@tradesmith.com so I can get back with you on the next mailbag issue.
If you guys don't keep emailing me, then I won't have anything for the mailbag issue every two weeks! Haha!
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