Yen Rescued from the Precipice

By Murray Dawes, Saturday, 04 May 2024

Can the Bank of Japan stop the yen from collapsing?

Sticky inflation is seeing US interest rates rise, which is heaping pressure on the Japanese yen. The BOJ intervened to stop the free-fall in the yen, but the games are only beginning.

In today’s Closing Bell, Murray looks at 50 years of trading in the USDJPY to show you how explosive the situation is and also points out that copper is looking extremely bullish.

The week started with a bang as the Japanese yen got hammered to levels not seen for 25 years.

The Bank of Japan decided enough was enough and stepped in to support the yen.

In today’s Closing Bell video I show you the explosive set-up in the USDJPY based on over 50 years of data.

There is easy money being made by ‘carry traders’ those borrowing cheaply in yen and investing the proceeds into US bonds at much higher rates.

As long as the yen behaves and continues to depreciate due to the large interest rate differential between the two nations, the trade is like shooting fish in a barrel.

However, problems can arise if huge currency volatility erupts, eating into returns.

If BOJ intervention causes the yen to strengthen more than investors expect there could be some unwinding of carry trades which could end up placing upward pressure on US bond yields at just the wrong time.

Alternatively if the BOJ fails to stop the rot in the yen and we see the USDJPY busting above 160 there is the real chance the yen could see very sharp falls.

That would place immense pressure on the BOJ to start raising rates.

By the end of the week the USDJPY had fallen from 160 to 153 (meaning the yen strengthened) which is a large move.

The game of cat and mouse between market participants and the BOJ is now on. It bears watching because of the possible repercussions for global bond and stock markets if we see wild swings.

The other market that I zero in on today is copper, due to the sharp rally we have witnessed over the last month.

The copper price is nudging up against some serious resistance, but the big picture is now looking incredibly bullish.

Any weakness in copper prices over the next few months should be seen as a buying opportunity and I show you the level copper needs to fall below to negate my current bullish stance.

I finish off today by outlining the state of play in the S&P 500. There has been some weakness over the past month on the back of high inflation and weak bond markets, but the weekly and monthly trends remain up.

As I show you in the video, short-term momentum is negative, but I need to see the weekly trend turn down before I change my bullish stance on stocks.

Regards,

Murray Dawes Signature

Murray Dawes,
Editor, Retirement Trader and Fat Tail Microcaps

All advice is general advice and has not taken into account your personal circumstances.

Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment.

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Murray Dawes is our resident expert trader and portfolio manager. He is a former Sydney Futures Exchange floor trader who went on to design custom trading systems and strategies for ultra-wealthy clients (including one of Australia’s richest families). Today, his mission is to help ordinary Aussie investors make profitable investments, while expertly managing risk.

He uses his proprietary system for his more conversative and longer-term-focused service Retirement Trader…and then applies the same system to the ultra-speculative end of the Australian market in Fat Tail Microcaps (this service is strictly limited and via invitation only).

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All advice is general in nature and has not taken into account your personal circumstances. Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment.

The value of any investment and the income derived from it can go down as well as up. Never invest more than you can afford to lose and keep in mind the ultimate risk is that you can lose whatever you’ve invested. While useful for detecting patterns, the past is not a guide to future performance. Some figures contained in our reports are forecasts and may not be a reliable indicator of future results. Any actual or potential gains in these reports may not include taxes, brokerage commissions, or associated fees.