The March Japanese Yen is currently testing its October 31, 2011 low at 1.2609. This bottom was created following a massive intervention by the Bank of Japan. After posting the bottom, the Yen firmed and retraced a little than 50 percent of the 1.3279 to 1.2609 range. About three weeks ago it reached a high of 1.3160, causing some concerns among Japanese officials who used a verbal intervention to stop the rally.
On February 13, the Bank of Japan surprised the market when it announced it was increasing its asset purchasing program. In addition, it set an “inflation target” at 1.00 percent. The move by the central bank is designed to strengthen the economy which is wallowing in deflation.
Typically, a central bank tries to prevent its economy from growing too rapidly; however, the action by the BoJ is an effort to give the Japanese economy a jolt. While the move by the BoJ seems aggressive, it had to be done to keep up with the U.S. Federal Reserve’s decision in January to keep interest rates at extremely low levels until late 2014. In fact, the two central bank policies are similar except that the Fed usually sets a time limit while the BoJ bases its exit strategy the economy’s performance.
If this week’s selling pressure can be sustained, then a break through the October bottom at 1.2609 is likely to trigger a further decline to a major 50 percent price level at 1.2519. Additional support is expected to come in at the 1.2500 psychological support price. Since these prices form a solid support cluster, expectations are that short traders will begin to take profits and bottom-pickers may even emerge so traders should be on the lookout for a possible technical bounce to the upside.
If downside momentum continues, then look for the old bottom and 50 percent level to become new resistance. The downside targets would then change to 1.2340 to 1.2334. This scenario could take place if the Bank of Japan decides to get more aggressive on the weakness and perhaps perform an intervention.
