How Will The Election Affect The Yen?
The Election & The Yen (JPY)
The Yen, as most FX traders are aware is an odd
bird. Many times it defies logic and even traditional technical analysis,
however, like most things, if you are patient you can identify patterns and
personalities. The Yen is no different, but the frequency with which it
displays relatively smooth and trending price action is less when compared
against the Euro or Pound. At present we may be heading back into one of those
periods where the Yen may offer traders an edge.
The last two weeks have witnessed an abrupt halt
to the Yen’s rise, there are a few reasons that seem to explain this:
-Â Fears of renewed BoJ intervention
-Â This weekends election
-Â The failure of the Nikkei to break 12,000
despite excellent economic data, the result has been decreased capital flows
The last two bullet points are intertwined to
some degree, and that is where I will offer some insights.Â
BoJ
intervention is simply a fact of life for Yen traders. Since March 16th we have
had the luxury of not being steamrolled if you were long the Yen. Gaining a
solid understanding of exchange rate hedging by exporters can help identify
areas where intervention is likely to occur but inevitably you may get caught at
the least obvious time.
I see an opportunity presently to take advantage
of a recent sell-off in the Yen that is a combination of all three scenarios
above but may be more related to the last two.Â
Much of the reason the Nikkei has failed to
breach 12,000 is likely due to the possibility of the reformist prime minister,
Koizumi, being obligated to resign if the outturn is poor for the LDP at this
weekend’s Upper House elections. The fear is that investors would lose the one
man seen as capable of steering the Japanese economy out of its’ 10-year malaise
and towards a sustainable recovery. The reality however, is that while Koizumi
projects the idea of reforms, his progress during his tenure indicates that
perception is different than reality. While the intent is clearly there; the
process has simply not allowed for far reaching reforms, the banking sector
being one such area.
Koizumi has indicated he has no intention of
stepping down, and even if he were, the reaction will likely be short and offer
an opportunity to add to Yen longs. The gathering economic momentum at present
in Japan is far more important than the outcome of this weekends elections.Â
Assuming that China does not create the much talked about “hard landing” and US
consumers remains somewhat loose with their pocketbooks, the path of least
resistance is up. This will likely lead to a move above 12,000 in the Nikkei,
renewed capital flows into Japan and a Yen that should hit the 100 level versus
the Dollar in the months to come.
As always, feel free to send me your comments and
questions.