Is USD/JPY Trade of Decade? US Dollar Nears 34-Year High Again.

21 Haz

If you’re a ‘90s baby, the yen is the weakest you’ve ever seen it. Putting it back with the cool guys in forex town isn’t going to be easy. In this Idea, we discover why.

Yen Languishes in 34-Year Lows

The Japanese yen is trading at a 34-year low against the stronger US dollar. This means that the volatile USDJPY pair is flying high. Very high. To many, this is the opportunity of a lifetime — pop a short, load up on the leverage and go for the jugular (to use Soros slang). Only that it’s not as easy as it looks.

So not-easy that there’s even a term for that. It’s called “widow maker trade” and it describes those unfortunate souls who dare to bet against the Bank of Japan in hopes of anticipating the right direction. It’s so difficult to predict the path of Japan’s interest rates that many have seen their fortunes wiped out in trying to do so.

So why’s the yen so badly hurt? Until recently, Japan’s central bank was the only one in the world to flaunt negative interest rates. It was holding on to an easy-money regime to stimulate economic growth — low to negative rates encourage businesses and consumers to borrow cheap money and spend it on whatever they want.

Biggest Loser on Forex Board

But this loose money policy has a downside — it makes the local currency highly unattractive. The Japanese yen is the biggest loser among the major currencies on the forex board so far in 2024. It’s down more than 13% against the dollar this year.

Against that backdrop, in March, the Bank of Japan abandoned its negative rate regime and hiked interest rates for the first time since 2007. The shift provided little relief to the yen.

The USDJPY this week blasted beyond ¥159 and extended its winning streak to seven days in a row. But bulls’ efforts to carry the exchange rate above the ¥160 milestone might meet an archnemesis.

Japanese officials have been monitoring the speculative moves around the yen and have said many times they’re ready to intervene by buying boatloads of it. Traders, however, have already seen this play out. And they've seen the aftermath, too.

A Failed InterYention

In late April, the Japanese yen tumbled beyond the key ¥160 level to the dollar, hitting ¥160.20 — a low last seen in 1990. Japan then decided to lean against the skyrocketing dollar and sank as much as $60 billion going long the yen and shorting the dollar.

Briefly, the yen rose about 5% before bargain-hungry traders were back for more.

Moral of the story? The downturn of the yen is predictable and until the Bank of Japan introduces a more aggressive policy to buck the trend, it may remain vulnerable to attacks.

More of the Same?

Meanwhile, bullish traders are excited to try their hand at shooting the dollar-yen pair to a fresh 34-year high. It must be noted, however, that the exchange rate is overstretched and overbought. This skews the risk-reward ratio and makes the upside look fairly limited, at least in the short term. Or does it?

Zoom out, and you’ll see the yen was trading at ¥300 to the dollar back in the ‘70s. And that’s not something Japan wants to see now. A cheap yen is generally good for exports but it makes imports a lot more expensive. And that’s where the Asian economy is getting its technology, energy, cars, and many foods from.

Japanese officials, namely the Ministry of Finance, remain tight-lipped about any potential intervention. What’s more, the Bank of Japan joins the silence with no forward-looking guidance on future interest rate hikes.

And all this means one thing — yen volatility is bound to continue as traders engage in some extra spicy speculation fundamental price discovery.

Long or Short?

If you’re in the trade, which side are you on? Are you long the dollar-yen or short it? Let us know in the comments below!