There’s No Stopping Yen Strength

02/06/2012 10:20 am EST

Focus: FOREX

James Chen

Chief Technical Strategist, FX Solutions

The Bank of Japan’s latest intervention, like similar attempts in the past, isn’t likely to stem yen strength, says James Chen, assessing the technical outlook for the USD/JPY pair.

Can Central Bank intervention work in the foreign exchange market? Let’s ask James Chen.

James, the Bank of Japan has a problem on its hands and they don’t want the yen to appreciate too much. Can Bank of Japan intervention work?

You know, that’s a great question, Karen. Take a look at the US dollar/Japanese yen (USD/JPY) daily chart. We could see several times in the past several months where the Bank of Japan has tried to intervene and tried to devalue their currency, which has worked to a certain extent, but only for a very short period of time.

chart
Click to Enlarge

We see the most recent spike in the dollar/yen, which is basically a devaluing of the Japanese yen as a result of the Bank of Japan intervention. However, we can see that usually it doesn’t really work for long. 

As we can see on USD/JPY, we are near all-time lows, which means that the yen is still extremely strong despite intervention. 

At the same time, I would say, however, that even though the trend is down on USD/JPY, I would be wary of going short because of the risk of further Japanese yen intervention. 

You really never know when the spike is going to occur. It’s very hard to tell, very hard to predict when the Bank of Japan will start intervening, thereby trying to devalue their currency.

When you look at the USD/JPY relationship, what’s your time frame?

Well what I’m looking at from a broader time frame is the daily chart, and that’s really what I always look at in terms of the long-term trend. 

Now in terms of actual trading, though, I will often drill down to the four-hour chart and the one-hour chart, and sometimes even shorter than that, but from a long-term prospective, from the overall picture prospective, I’m looking at the daily chart.

And just to step back and look at the really broad picture, central bank intervention has been called “Novocain;” it just delays the pain. Do you agree with that?

I absolutely agree with that, and that’s a great representation of what happens here. 

We can see many, many spikes in the USD/JPY, which is basically a devaluing of the yen currency. At the same time, it hardly ever works for a long period of time. It’s always just a short-term fix for the yen, but overall, it doesn’t seem to be working from a longer-term prospective.

See related: Always Bet Against Intervention

And your chart support/resistance levels are based on price action?

Absolutely, and it’s a little bit different with the USD/JPY because of the fact that there is a lot of intervention activity going on there, but in terms of support and resistance, yes, absolutely they still hold true. 

Now to the downside I have 76, which is near the all-time low in USD/JPY. To the upside, I have around 80. 

If Japanese yen intervention is to work, and there’s a breakout above 80, then I’m looking for further levels to the upside including the 84 level, but for now, we’re looking at a lot of weakness in USD/JPY and a lot of strength in the yen.

And trading those ranges, 70 to 80, 75 to 80?

Yes, absolutely. We’re looking at range trading right now. So in terms of range trading, yeah, between those levels is probably a good place to be looking at…at least for the near future.

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