The moves in the yen have been seen before but I believe this market has taken a lot of new and seasoned traders by surprise. Usually, when there is a global disruption the move is into the yen but we’re generally seeing the opposite occur.
By the end of the month, we should see some end-of-month rebalancing as traders and investors find their portfolios overweight some currencies that have dramatically appreciated against other currencies. The same can be said for central banks like the Swiss National Bank (SNB) who said that they would intervene in the currency markets. Some of the flows will have been accelerated by the war in Ukraine, as traders sought to park their money in safe, liquidity-rich jurisdictions. In turbulent times, a safe haven investment is one that is expected to retain or increase in value. In times of market turmoil, investors seek out safe havens to limit their losses. The Swiss franc and Japanese yen come under this umbrella of haven. The US dollar also acts this way as it is the global reserve currency and is needed to globally trade, especially in commodities like oil.
The chief of the SNB said when deciding which currencies to intervene with, the bank would consider monetary policy divergence and interest rates. In both Japan and Switzerland, the bank rate is negative, so investors pay a premium to park their money there. Furthermore, Japan and Switzerland do not experience high inflation as do the United States. A currency with less inflation, such as the Japanese yen, should appreciate against currencies with higher inflation, and Japan has extremely low inflation. As we see the yen depreciating against commodity pairs and US dollar, the BoJ's negative interest rates must serve another purpose. The US dollar over the last 12 months has been appreciating alongside the moves into the US benchmark yields as participants prices in the monetary policy changes by the Fed.
The "Carry Trade" is a popular trading strategy in which people borrow in a currency with low rates and park it in a currency with higher rates (the classic example is Australia) and pocket the difference. That strategy usually works well when people have lots of risk appetite but can crash when they become scared or risk averse. Under current conditions, the markets have been very risk-averse, and we only saw rising commodity prices due to supply chain disruptions. But just because we’re on the brink of World War 3 we should look through the mainstream media headlines and see what the markets are doing to prepare for the coming days, weeks, and months.
The biggest macro change is that the central banks like the Fed, BoC & BoE have changed their monetary policies and are now tightening in a rate hike cycle and will remove reserves off their balance sheets too.
The monthly chart of the USDJPY shows that the monetary policy divergence that was signalled from last year has now resulted in a monthly breakout candle of a 35-year trend line. With the USDJPY trading around the 123.00 level and with 130.00 in sight and a swing high target from May 2015, we could be in for a much bigger move in this pair.
Another reason why this trend is set to continue into the last days of March is due to the retail trader sentiment.
The ActivTrader USDJPY sentiment indicator shows that 94% of traders in this trade are trying to short. So, until they flip to neutral or get stopped out, this move will continue to squeeze them.
Looking at the recent trades in USDJPY which came on a test of a previous day’s highs I am not going to chase this market today but wait for a pullback into the 122.40 area in the coming days.
This morning’s forex heatmap shows the yen to be the weakest relative to the other currencies with flows going towards the US dollar, AUD and CAD.