Could The Bank Of Japan Be Forced Into Another Intervention By Monday?


It is getting interesting. We have a dollar “issue” in the making. I think it may play out at some time in the near future. Markets are hard to predict when they get near the edge. It is possible that an important ramp up in the action could take place as early as Friday in NYC. One way it could play out:

The money flow is against the dollar. It seems to be moving from everywhere. As Zero Hedge pointed out even the Brazilians are seeing money move to their currency. We have two closings for the USDCHF below par. So we’re in some dangerous territory there. This has happened before. It was short lived and below the big figure did not hold. It feels different to me this time.

The market is pushing the Euro and the Pound as well. So what could happen next?

To me it has to be a break in the USDYEN. The market HAS to resolve what is out there. The BOJ said “NO Mas” when the dollar was about 83.50. We are about 1 big figure away as I write. That is a lot of ground to cover. Unless there is a buyers strike. If the Japanese market trades the yen to the low 84s tonight the door gets open for a move below 83.99. With another 24 hours of trading in the week. Below 84 is when something must break. Either we see the BOJ or we don’t. I think there is a decent chance the Friday NYC close could be at levels where there would be a question mark as to what the hell the BOJ will do on Monday morning.

I think this will happen sooner or later. The timing seems ripe short term as everything is leaning against the dollar right now. (thanks to “whispers” of QE-2) The Yen has always been a “go to” currency when the dollar is looking shaky. Except that the BOJ has put its foot down. And pretty soon they will have to do so again. Only two options:

When/if the USDYEN gets to the mid 83.50’s the BOJ shows up and buys sufficient dollars to bring the rate to above 84.50.

Should that happen I would expect that the Yen crosses will react strongly in favour of the CHF, EUR and Pound. When that happens it will create demand that will be reflected in the dollar. The Euro currencies are all going to rise. The dollar will have to get cheaper as a result. Certainly this would make Ben Bernanke happy. I doubt the Swiss National Bank will be too pleased with this result.

The other possibility is that the BOJ is a no show. We see them again at 82.90. The intervention results in the DLRYEN bouncing to only 83.50. And it trades lower than that outside of the Japanese time zone.

Cha-ching on that result. This would mean that the BOJ has no intention of drawing a line in the sand. That they, “Only want to slow an inevitable adjustment”. Should that be the case I would conclude that the DLRYEN is going to 80. It will happen in fits and starts for the next three months. It will drag the dollar lower versus all the European currencies.

My problem is that either of these outcomes brings more instability. And both of them point to a lower dollar. Precisely what D.C. would like to see happen. Of course this would put the stiff-arm on all those holders of our bonds. It’s hard to predict where that goes.

This could all be a head fake. The dollar could be oversold and find a bid. I would put that in the “Least Likely” column.

I think we are (once again) at one of those nexus points. Take that to mean that all FX positions have high risk attached to them. Don’t take my words as a trading recommendation. My recommendation on FX trading is to not to trade FX for the time being unless you do it for a living. I am not forecasting an FX rate. I am forecasting instability. The key will be what the BOJ does when if they are pushed.

This post was published at the author’s blog.

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