The US dollar has initially dipped against the Japanese yen on Monday, but then turns around quite rapidly to form a bullish candlestick. The Japanese continue to intervene in bits and pieces, but it’s a losing battle. We are now to the point where Japan has 2 options: higher interest rates, or a significantly weaker yen. There is no third option until things change at the Federal Reserve or inflation gets beaten back.
Japan is in a very unique situation, as its debt to GDP ratio is a 266%, one of the highest in the world, if not the highest. At this point, it has an aging population so the idea of it ever paying back the debt is laughable at best. If interest rates rise, it’s very likely the bond market could get out of control, and at that point it’s hard to tell what would happen to Japan, but it would not be anything good. Because of this, the Bank of Japan has been buying bonds in a limited fashion to keep the 10 year down to 0.25%. By doing so, they are essentially doing the same thing as printing currency and flooding the Forex world with Japanese yen.
On the other side of the equation, you have the Federal Reserve which has been tightening monetary policy, and the US dollar has been strengthening anyway. This is a bit of a perfect scenario for the market to continue going higher, and it’s been noted that the Japanese on the first intervention alone use 15% of their foreign exchange reserves. The Bank of Japan is essentially stuck with a huge problem, but what could be interesting would be if they do in fact finally let the bond market rise in yield, which would probably send the Japanese yen strengthening quite drastically. That could be the beginning of the end for this, but at this point you will probably see the Japanese yen go parabolic.
- Until the Bank of Japan gives up its yield curve control, or for some reason the Federal Reserve changes its monetary policy, this is a market that you have to be a buyer of dips.
- That doesn’t necessarily mean that there will be the occasional pullback but trying to short this pair because “it’s too expensive” is going to run the risk of ruin.
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