Yen stalls today--but this isn't a reversal of the rally in Japanese stocks

05/20/2013 6:16 pm EST


Jim Jubak

Founder and Editor,

Today the yen stalled in its seemingly relentless descent versus the dollar on comments from Japanese Economy Minister Akira Amari that the yen had corrected a lot and that further losses would have a negative effect on the Japanese economy.

On that the yen rallied 0.97% against the dollar to 102.28. The yen had opened the day at 103.12. (Remember that since the yen/dollar exchange rate is expressed as yen to the dollar, a higher number indicates a weaker yen.)

Speculation among currency traders is that Amari’s remarks were intended not to stop the drop in the yen but to moderate its speed. Although the Bank of Japan and the government of Shinzo Abe remain committed to weakening the yen until they achieve a shift from Japan’s ingrained deflation to inflation, the last thing the central bank or the government wants is a fall so fast that it seems out of control. That would panic the financial markets and undo any stimulative effect that a cheaper currency would have.

Looking at the charts, JP Morgan projects that the yen faces its next major test at 103.50 to the dollar, not far below the 103 to 103.10 level the currency reached on May 17. If the yen drops through that support, the next target would be 105.5. That level marks a 61.8% Fibonacci retracement  from the yen’s 2007 high.

I think it’s extremely unlikely given the momentum behind the yen’s recent drop that the currency will stop on a dime at 103.

We may get some backing and filling as the markets move through support at 103, but I think the odds favor a move to 105 without too much market angst. I’d expect it to take longer, however, to take the yen through 105.

At the moment, the Wall Street consensus remains 110 by the end of 2013.
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