The DeCarley Perspective Trading Newsletter

BOJ easing weakens Yen, will it last?

  This newsletter was emailed to DeCarley Trading brokerage clients on February 19th, 2012

Futures market analysis by DeCarley Trading 

**There is substantial risk of loss in trading futures and options.

**Past performance is not indicative of future results

On the radar:

  • BOJ easing weakens Yen, will it last?

Yen Futures

Currency intervention to control price is done indirectly through the manipulation of imports, exports or security (bond) purchases, or directly by the purchase or sale of large amounts of currency by central banks in the open market.  If this seems a bit unfair to those speculating in the markets, it is.  Nonetheless, there are other agendas at play; in the overall scheme of things, speculators are at the bottom of the importance totem pole when it comes to government behavior.  Unfortunately, this is something that must be understood, and accepted, by anyone wishing to trade currencies. 

The Japanese Yen has been the target for frequent and massive central bank interventions in recent years.   In mid 2003, after a nearly 14-year period of deflation and economic anemia, the Japanese central bank essentially printed 35 trillion Yen to purchase about $320 billion in U.S. Dollars. 

More recently, in March of 2011, the Japanese central bank made a similar attempt to cap a rally in the Yen against the U.S. Dollar.  This time, it was actually a group comprised of seven of the world's most influential central banks that intervened in what are normally free-floating currency markets.  The USD/JPY was trading at an all-time low near 76.00 (equivalent to an all-time high in the futures market near 129.50).  Because the astronomical Yen valuation threatened the ability of the Japanese economy to snap back from a March 11, 2011 earthquake, the G-7 coordinated an operation in which each of the participating nations sold large amounts of Yen at the open of their respective trading day beginning with the BOJ (Bank of Japan).  In similar actions, the BOJ sold large amounts of Yen on the open of Asian market trade on August 4, 2011.

Late last week, the Bank of Japan announced it would be increasing the size of its asset purchase fund.  Similar to the QE program implemented in the U.S. the Japanese government is engaged in the process of purchasing its own debt securities as a measure of artificially inflating bond prices to keep yields low.  The result is an injection of liquidity into the economy and a weaker currency.  Accordingly, the Japanese Yen suffered the largest weekly loss against the U.S. dollar since November.

Thus far, all of the BOJ's attempts to weaken its own currency have been successful in the short-term, but outside influences within the currency markest have consistently overcome the artificial bearish pressure.  It is too early to know whether or not the BOJ has finally managed to crack the unwanted Yen bull, but in our experience traders are typically best off playing with the odds, rather than against them.  In other words, approaching the markets with a "this time will be different" mentality tends to be a low probability strategy. 

From a seasonal standpoint, data compiled over the last 35 years reveals that the Yen has a strong tendency to find a significant bottom in early to mid February preceded by about a week of significant weakness.  Obviously, we've seen the typical set-up sell-off; however, the strength tends to fade by March so Yen bulls should avoid overstaying their welcome. 

The Yen is currently trading below its October 31st intervention low, but we attribute much of the recent pressure to a market's tendency to hunt for sell stops beneath "obvious" levels of support (which is where many traders place stop orders.  Should the selling continue, the next major area of support in the March Yen futures sits at 1.2470/1.2450. 

We believe that seasonal and technical support will work in favor of the Yen in the coming week or two.  Accordingly, we are looking for the possibility of a technical bounce into the 1.2900 area.  Should the financial markets fall back into turmoil, it is possible that a flight to quality bid bring the Yen back to the 1.3100 mark. 

Many of our clients are currently holding short March 124 puts in which about 29 ticks were collected.  We now know that we were a little early to the party on this trade, but we aren't willing to throw in the towel just yet.  We might be looking to add to this trade in the coming sessions if we can collect considerably more premium than was gained on the first outing. 

Those without a position, might look to sell March 123.50 puts for about 35 ticks, or the 124's for about 45.  A more conservative approach might be playing the e-micro futures which are 1/10th the size of the original 125,000 unit contract and carry a margin charge of $250 per contract.  The e-micro trades inversely to the Yen futures contract (it is the Dollar vs. the Yen not the Yen vs. the Dollar), so the contract is valued near 79.50 rather than 1.2900ish.  Bullish Yen traders could sell the e-Micro currency USD/JPY pair (equivalent to selling the USD and buying the JPY).  The symbol for this contract is M6JH2 and a trader makes or loses about 1.10 per tick. Similarly, those holding short puts that are interested in hedging their bets could buy the USD/JPY e-micro currency to take some of the heat off of the trade. 

 Yen Futures Chart

 

DeCarley Trading

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**There is substantial risk of loss in trading futures and options.

Past performance is not indicative of future results.  The information and data in this report were obtained from sources considered reliable.  Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities.  Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.

 

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