To the dismay of the Bank of Japan (BOJ), the yen is now approaching its all-time high against the dollar, just months after the central bank had intervened to weaken its currency. Likewise, the Swiss National Bank (SNB) is on the defense as the Swiss franc is fast approaching its central bank-imposed peg against the euro.
Will the BOJ and SNB step up to weaken their currencies and protect their exports industries again?
USD/JPY, the BOJ's measuring stick for yen strength, has fallen about 200 pips within the span of a week. Quite uncharacteristic for this normally docile pair, right? Now, it's below 76.50 at levels not seen since October 2011!
But believe it or not, there are still many that believe the yen isn't overvalued yet, even as it approaches its all-time high at 75.57. Some even predict that it will continue trekking north and that USD/JPY may hit 73.00 within the quarter.
Needless to say, Japanese officials have been pulling their hair out in frustration over the yen's rise. As a matter of fact, Finance Minister Azumi couldn't take it any longer and decided to jawbone a bit yesterday.
Azumi tried to scare off yen buyers by saying that Japan will take "decisive measures" against the yen's volatility and speculative moves in the forex market. But it seems like his threats fell on deaf ears because the markets pretty much just shrugged off his comments!
To me, this suggests that Japan will have to do more than jawbone to get reactions from the markets - the BOJ will probably have to engage in a direct market intervention to stop or at least slow the yen's appreciation.
I would say that now's a great time to review my tips on trading yen pairs and how to gauge the threat of a BOJ intervention. It'll come in handy, you'll see!
The SNB is under similar pressure as the BOJ. A quick look at EUR/CHF's chart will reveal that the pair is trading dangerously close to 1.2000 - the exchange rate floor that the SNB had previously set for the pair.
That being said, it will be extremely tough for the EUR/CHF bears to push price back down below 1.2000. For one, the SNB has stated earlier this month that they are very committed in keeping the level intact.
In addition, the SNB has the support of other nations. World leaders who attended the recently concluded World Economic Forum expressed their confidence in the SNB's ability to maintain the floor.
For now, it appears that the SNB has two possible courses of action. The first one is to directly defend the 1.2000 level by selling the Swiss franc against the euro in big doses just like last time. The other option is to raise its floor to 1.2500 like some analysts had previously predicted. By doing so, they can pressure the market to let go of their EUR/CHF shorts without necessarily spending a large amount of money right away.
As both EUR/CHF and the USD/JPY approach critical levels, some words of caution seem appropriate. Know that during central bank interventions, price can spike as much as 5% in a matter of seconds. You can also experience slippage - the term used by traders to describe a broker's failure to execute an order at the desired price.
I think it's safe to say that it really pays to be alert to interventions. It can set you up for big gains in a short amount of time, and it can help you reduce risk, and avoid big losses and getting whipsawed. If you're planning to trade these pairs anytime soon, then I wish you the best of luck!
- Yen Rally - No End in Sight Yet? 06:00 25 August 2010
- How Likely Is a EUR/JPY-based Intervention? 05:41 17 January 2012
- The Swiss Franc Before and After the SNB Rate Decision 05:28 17 December 2011
- Currency War A-Brewin' 06:15 18 January 2013
- What's Next for EUR/CHF? 05:31 17 March 2012