Last August 23, Japan's sovereign credit rating was downgraded by Moody's to Aa3 from Aa2. According to Moody's, the primary reason behind the move was the huge increase in Japanese government debt since the 2009 global recession.
Moody's also indicated that the constant changes in leadership have prevented the Japan's government from making sustainable changes to fix its deficit problems. To make matters worse, Japan is still in recovery mode from the earthquake-tsunami-nuclear crisis.
Moody's downgrade now puts its rating in line with S&P's assessment. If you recall, S&P already lowered Japan's debt to AA in the past, which is also the fourth highest in its own scale. The downgrade, in addition to currency intervention fears from Japan's central bank, led to a knee-jerk yen sell-off.
Given yen's immediate reaction to the announcement, you might think that this may end up hurting the yen in the long-run. If you look at the bigger picture, however, you'll probably think differently. In fact, shortly after the sell-off, the yen regained most of its losses and actually ended the day with gains over the dollar, euro, and the pound.
You must remember that the debt haircut came AFTER a series of downgrades by major rating agencies of other economies. The euro zone just barely survived its debt crisis while the U.S. had its sovereign credit rating cut for the first time last August 5.
If anything, the downgrade could lead to risk aversion and help the yen rally even more. For now, the only roadblock I see standing in the way of the yen bull train is the possibility of a central bank currency intervention!
I know I'm no Big Pippin, but I do have some technical analysis talents of my own. Let's take a look at the possible yen-positive long-term scenarios that appear to be playing out on the three major yen pairs: USD/JPY, EUR/JPY and GBP/JPY.
Intervention whuttt? Even though the Bank of Japan (BOJ) intervened in the markets a couple weeks back, risk aversion has caused traders to push USD?JPY all the way back down to the 76.50 level. If you ask me, this is starting to look like a bearish flag! If we see this pair break below 76.00, it might head much lower!
Ahh, EUR/JPY, Cyclopip's arch-nemesis! After breaking through key support at 113.75, EUR/JPY has traded in a descending channel over the past three months. While Stochastic is showing upward momentum, the pair is currently finding resistance at 111.00 and the top of the descending channel. With sovereign debt concerns still plaguing the euro zone, we may just see this pair head towards 100.00!
Last but not least, let's take a look at Guppy. The pair has been trading in a descending channel now over the past FIVE months. With that doji forming just under the falling resistance line, it might be time jump on the bandwagon and go short!
- S&P Warns of Possible Downgrade for Japan 05:32 21 February 2012
- Credit Rating Woes 04:49 10 December 2009
- Is the US's Credit Rating in Jeopardy? 09:48 27 May 2009
- S&P Adds to the Pain in Spain 06:09 11 October 2012
- Moody's Slaps France with Downgrade 06:32 20 November 2012