Yen's pendulum revisits prior hike levels
The yen’s outlook may be clearer than the Bank of Japan’s view on the economy.
In the two months since the Bank of Japan raised its policy rate on July 31, USD/JPY has traveled from 149.41, the closing price the following day, to a 139.58 year to-date low on EBS and nearly back again.
These large swings in USD/JPY beneath the 150 level has been accompanied by or come amid quickly adjusting rhetoric by Japanese officials.
Too weak a yen may reignite inflation and trigger displeasure among voters as they prepare to go to the polls. Too strong a yen might stall an economic recovery that is helping the country exit deflation.
Options traders appear to believe the officials, if not the markets, will find the right balance. While volatility levels are staying elevated due large swings in spot, options that capture outlier moves in dollar-yen are at the lowest level of the year.
While Japanese officials seek a goldilocks outcome for the yen, dollar traders may already be riding the wave of one. Positive seasonals, shifting geopolitics and an improving U.S. economy suggests being long dollars. These factors support buying USD/JPY dips within the Ichimoku cloud until new signals appear.
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Yen chart https://tmsnrt.rs/3BsOvMT
(Robert Fullem is a Reuters market analyst. The views expressed are his own.)
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