Watch This Key Correlated Market for the Yen

08/19/2010 12:01 am EST

Focus: FOREX

Kathy Lien

Managing Director and Co-Founder BKForex LLC, BK Asset Management

The Japanese government continues to step up their threats of intervention. Although the Japanese yen has stabilized, it has been trading near its 15-year highs for the past week. In the latest development, Prime Minister Kan and Bank of Japan Governor Shirakawa announced that they will meet on August 23 to discuss the yen. However, physical intervention is not guaranteed because these are the games that Japanese officials like to play to scare the market into believing that they will intervene in the currency.

Of course, it would be risky to just shrug off their threats because the yen is trading at very high levels and the Japanese government may finally decide to bite the bullet and intervene. Another option to bring down the value of the yen would be to increase stimulus. According to Japanese Economy Minister Arai, the government will debate additional stimulus measures on August 20. Everyone including the Japanese know that physical intervention is ineffective unless it’s coordinated (the US or euro zone has no interest in participating), and for that reason, they could opt for stimulating the economy, which may actually be a larger surprise. 

Meanwhile, fear of Japanese intervention is not the only reason why USD/JPY has stabilized. Since the beginning of the week, the currency pair has maintained its close relationship with US yields (see chart below). Yields have increased today, and so has USD/JPY.

Click to Enlarge

US yields are an important market to monitor if you are trading the USD/JPY currency pair.

By Kathy Lien of

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