Bank of Japan Devaluating the Yen?

12/04/2009 12:01 am EST

Focus: FOREX

Bank of Japan (BOJ) governor Masaaki Shirakawa is in a tough spot. Will he resist the calls from Japanese corporate and government leaders to take decisive actions (such as currency intervention) to stop the rise of the yen? Or, will he resist the calls for action, hoping to discourage other nations from also intervening in the FX markets to weaken their currencies versus the flailing US dollar in order to gain a competitive advantage in exports versus other nations.

On Tuesday, the BOJ board voted to provide ten trillion yen in three-month funds at the current 0.1% rate, as well as one trillion yen into short-term money markets in order to provide ample liquidity to an economy struggling under the weight of a strong yen. Japanese consumer prices fell by 2.2% in October versus year ago levels, which marks the eighth consecutive month of falling prices. This is leading some analysts to fear that deflationary pressures will get worse unless something is done to curtail the rising yen.

The BOJ actions were designed to—hopefully—stem the tide of the rising yen, as it makes a statement to the market that the BOJ will maintain an accommodative monetary policy for some time to come. However, with Vietnam devaluing its currency by 5% last week and China's slow movement to allow the renminbi to float freely versus its current peg to the USD, BOJ officials may eventually have no choice but to intervene in the FX markets to stop the yen's rise in order to prevent its economy from sliding even further.

Looking at a daily continuation chart for yen futures, we notice the market has been in a significant uptrend since yearly lows were made back in early April. Prices remain above both the 20- and 100-day moving averages, which would confirm the current bullish trend.

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The 14-day RSI has moved out of overbought levels, but is still reading a rather strong 64.99. Taking out the spike above 1.1700 caused by the "flight to liquidity" after the Dubai World debt crisis was announced, resistance is found near the 1.1650 level. Near-term support is seen at the 20-day moving average, currently near the 1.1250 area.

By Mike Zarembski of

Born in the grain pits of the Mid-America Commodity Exchange (MidAm) in the early 1990s, Mike's futures career soon shifted to the offices of TD Waterhouse in 1999, followed by Xpresstrade in 2002 and eventually optionsXpress in 2007.

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