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Let’s start this year’s year-end review with the Japanese yen. And as you can see in the chart below, the yen’s price action had three clearly distinct phases or chapters: (1) the advance, (2) the steady period, and (3) the retreat.

USD/JPY: Daily Chart
USD/JPY: Daily Chart

Let’s tackle each chapter and what was driving price action, shall we?

The Advance

Charge!
Taishō! The enemy flee! We must press our advantage!

As I mentioned in yesterday’s monthly recap of this year’s major themes and events, risk sentiment started the year on a very sour note, thanks to the January Chinese equities meltdown. The yen therefore had a very good start to the year, as fear and uncertainty pumped up demand for the safe-haven currency.

The yen began giving back some of its gains during the second half of January, however, when risk appetite briefly returned on jumping oil prices, which was attributed to a cold front that prompted speculation of higher oil demand. This bruising was followed up by a month-end wallop when the BOJ unexpectedly pushed rates into negative territory, after staying pat since October 2010.

Fortunately for yen bulls, oil resumed its decline in February and Chinese equities continued to drag global equities lower. There were also geopolitical events like Turkey allegedly planning to invade Syria at the time. Also, the Brexit referendum and Brexit-related news began to grab the market’s attention. In short, there were risk events aplenty, enough to keep yen bulls fat and happy.

Moving on, the yen felt some pain in March, thanks mainly to improved sentiment due to the commodities rally at the time. And that commodities rally, in turn, was thanks to the People’s Bank of China (PBoC) slashing the reserve requirement ratio (RRR) for big lenders by 50 basis points to 17%. The yen managed to recover a bit mid-month after the BOJ announced no changes to its monetary policy while removing the phrase that the BOJ “will cut the interest rate further into negative territory if judged as necessary.” The recovery was premature, however, because Kuroda later backtracked and said that “Of course, there’s a possibility that we will decide to cut interest rates further.”

April was a pretty volatile month for the yen, with risk sentiment tracking oil prices for the most part and switching from risk-off in one week to risk-on in the next, and demand for the yen building-up or fading, depending on the prevailing risk sentiment during that week. Also, rumors, such as the one reported by Bloomberg about the possibility of a deeper rate cut during the April BOJ statement, only added to the volatility. And the BOJ’s decision to stand pat yet again only added to the volatility.

Incidentally, the BOJ’s decision to not do anything, even though it downgraded its growth and inflation projections, caused the Nikkei 225 to plunge by 3.6% in one day, souring global sentiment while stoking demand for the yen in the process and allowing the yen to finish the month strong.

Next, May was a weird month for the yen because risk aversion was the dominant sentiment but the yen ended up being a net loser for the month. And the likely reason for this is that yen bulls got spooked after Prime Minister Shinzo Abe said at the start of the month that sudden forex moves being undesirable, adding in a later speech that “The exchange rate must be stabilized,” and that Japan would “carefully watch these movements“ and respond as necessary.

Thankfully, all was right in the world again come June, thanks a plethora of risk events, with the most important (and most profitable for yen bulls) being the Brexit referendum. Unfortunately, the yen got a beating in July, initially due to wariness ahead of the Japanese Upper-House elections and later, when Abe’s party won and Abe announced his fiscal stimulus plans. Although the yen recovered during the later half of the month, thanks to doubts over Abe’s fiscal stimulus and the BOJ’s decision to to introduce only very limited easing, much less than the market was expecting, while shooting down the idea of “helicopter money.” Another thing worth pointing out here is that the BOJ promised to conduct a “comprehensive assessment of the developments in economic activity and prices under ‘QQE with a Negative Interest Rate’ as well as their policy effects.”

Okay, let’s move on to …

The Steady Period

Siege
Remember, Taishō. Sun Tzu says that a protracted siege will exhaust your strength.

The steady period lasted from August to October. And it is, as the name implies and as you saw in the chart earlier, a period of consolidation. Price action on the yen was relatively subdued during this period, especially in August, probably because forex traders were waiting on the BOJ’s promised “comprehensive assessment.

The yen did show signs of strength in September, thanks to the clear prevalence of risk aversion during the month. And while the BOJ did finish its “comprehensive assessment” and introduced its “QQE With Yield Curve Control” framework, the BOJ didn’t actually ease further, so traders turned to the risk-off mood for direction.

The yen was still mostly range-bound in October, but it was showing some signs of weakness, probably because risk appetite was the more dominant sentiment, given the expectations (at the time) that Hillary Clinton will win the U.S. Presidency, as well as the oil rally due to OPEC’s planned production cut.

Apparently, the yen’s signs of weakness in October was a precursor to …

The Retreat

Retreat
Taishō! We are outmatched! We must retreat!

November was a very, very, very bad month for the yen. Heck, most yen pairs gave back half of their gains for the year so far in November. Yes, it was really that bad. Imagine that! Your wins from the past 10 months halved in just 1 month. Ouch! Not only that, as Pip Diddy has been pointing out in his weekly recaps (here, here, here, and here), the yen was consistently the worst-performing currency of the week in November.

And the yen’s weakness all started when Trump became the President-Elect of the United States, since that event caused U.S. equities and U.S. bond yields to surge, as investors looked forward to Trump’s planned fiscal policy while conveniently forgetting the mainstream media’s original narrative that a Trump presidency will lead to economic catastrophe in the U.S. and in the rest of the world.

Speculation on Trump’s planned fiscal stimulus, which resulted in week after week of surging bond yields and rising equities then continued to slap the yen around, especially the rising bond yields, since Japan’s monetary policy is to keep the yield of Japanese government bonds at around 0%, which makes Japanese bonds less attractive, given the widening yield spread, as well as fueling speculation that the BOJ may act. And act the BOJ did when it announced two bond-buying operations to keep yields low. Although, it later got revealed that nobody wanted to sell to the BOJ, amusingly enough.

Anyhow, rising bond yields continued to haunt the yen in December. And the Fed’s recent decision to hike rates (while signaling more rate hike to come) only made life tougher for yen bulls. And that’s where we stand today.

Overall Performance

Yen's Performance as of December 21, 2016
Yen’s Performance as of December 21, 2016

Overall, the yen turned out to be a top winner this year, losing out only to the Loonie. And the yen’s strong performance was thanks largely to plenty of risk events, like the Chinese equities meltdown and the Brexit referendum, during the course of the year. Although lack of faith in the effectiveness of the BOJ’s monetary policy also appears to be a major factor as well.

Trump’s victory in November, and the resulting turnaround in sentiment, was a very serious blow to the yen, however, so much so that many yen pairs surrendered half of 10 months worth of gains in that one month. The rise in bond yields is especially toxic for the yen, given the BOJ’s policy of keeping yields at around 0%.

Still, most yen pairs were able to hold onto their gains (what remains anyway), and so the yen is ending the year on a higher note.

See also:

A Monthly Review of 2016’s Trading Themes

The Pound Gets a Massive Pounding in 2016