Last Friday, we saw the yen bulls finally come out of hiding to push USD/JPY to 92.18, almost 100 pips lower from its intra-week high. The move took the market by surprise, as the yen has been the forex market's whipping boy for several weeks now.
The yen's price action has caused some industry analysts, including myself, to start believing that currency will continue to strengthen in the coming trading days. Here are 4 reasons why:
Reason 1: Japanese officials think the yen fell too fast.
Prior to Friday, the yen had been one of the weakest performing currencies among the majors. Its sell-off primarily started when talks about the possibility uber-dovish Shinzo Abe becoming the country's next Prime Minister broke out. Since Abe came into office, the prospect of the government getting more control over the BOJ has only subjected the yen to further selling.
At first, Japanese officials were fine with the yen's level. One of them was even caught saying that they were comfortable with USD/JPY rising to the 90.00 to 95.00 level. This doesn't seem to be the case anymore. In fact, Japanese Finance Minister Taro Aso said in a statement last Friday that the yen's decline may have been too fast.
While it is true that Japanese officials generally want the yen to be weaker to make Japan's exports extra-competitive, having a super weak yen too soon, too fast could do more harm than good. For instance, imports could become too expensive too quickly and hurt the living standards of Japanese consumers.
Reason 2: The G20 meeting is upon us.
It's common knowledge that Japanese officials have been adamant in their quest to weaken their own currency. However, with the G20 meeting coming up, many traders are starting to think that a Japan might start changing its tone to avoid criticism from other major economies.
Taro Aso's comments might be a deliberate move to curb disapproval about the excessive weakness of the yen. After all, who wants to engage in a full blown currency war when your country is still trying to recover from the effects of the recent recession?
Reason 3: Good news from Japan's Q4 2012 GDP report?
Market junkies are anticipating that Japan's GDP report would show that the economy did well in the last three months of 2012.
Due on Wednesday at 11:50 pm GMT, the report is seen to show a 0.1% uptick for the quarter. If estimates are correct, this would mean that the economy actually expanded by 0.4% compared to a year ago.
Why are analysts being optimistic, you ask?
Economic gurus think that the GDP report could reflect stronger private consumption. The component which makes up over 60% of the economy could show that the cold weather probably boosted demand for winter clothing. Capital spending is also seen to have improved as rebuilding of homes in areas hit by the earthquake and tsunami in 2011 probably picked up.
Of course, the yen's slide following Prime Minister Shinzo Abe's campaign to weaken the currency probably might have boosted exports as well.
Reason 4: USD/JPY looks like it's ripe for a reversal.
On the eighth week of USD/JPY's rally, the pair formed a doji around its previous highs! Graduates of the School of Pipsology know that this candlestick is widely regarded as a sign of indecision among traders and therefore, a reversal signal.
Since the pair was unable to rally past resistance at 94.00, could we see it tumble soon? Maybe.
There ya have it folks! These are the reasons why I probably won't think about selling the yen in the next few days.
As I always say though, take my (just like you would any other analyst's) word with a grain of salt. Remember that nothing is set in stone and no one could actually really predict what could happen in the financial markets.
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