Financial market research and analysis

The USDJPY slipped below the 109 mark in Tokyo. Nikkei and Topix were flat to positive on mounting speculation, and hope, that the BoJ may be preparing an extreme intervention plan to curb the appetite in yen. According to the MoF data, Japanese investors sold net Y50.1 billion worth of foreign stocks and Y1.5551 trillion worth of foreign bonds over the last week; foreigners invested Y415.2 billion in Japanese stocks and Y30.2 billion in Japanese bonds. Still, Y3.7700 trillion worth of bills were sold due to deep negative yields, but the unwind in JGBs did not suffice to drag the yen lower.
 
The most popular question in the FX market is what comes next after the USDJPY broke the critical 110.00 level. The US dollar lost more than 10% against the yen since the Fed raised its rate in December. All eyes are on the BoJ now. The BoJ Governor Kuroda said they ‘will ease more via quantity-quality-rates if necessary’ adding that the trend for economic recovery remains moderate with a weak output-to-exports ratio and that the inflation, which is likely near zero for now, should accelerate towards the 2% mandate target. It is now time to convince the market that the BoJ has the efficient tools in hand to do so.
 
It is clear as day that the Abenomics failed to lend the desired result in consumer prices. The market response to the negative rates (NIRP) has been a clear rejection. Japan stands at a critical moment as exporters are driving the rally in the yen as they bring the cash back home, rather than speculators. In this context, cutting the rates to more negative will not suffice to move the market in desired direction. Something different and massive needs to be done to reverse the situation.
The next move for the BoJ could be buying assets, helicoptering money as many would call it nowadays.
 
Back to the yen, the looming uncertainties keep the yen bears muted for the moment. It is all in the hands of the BoJ. The shorts in USDJPY and EURJPY may find it cautious to hedge against a reversal risk. While traders stuck in a long USDJPY position could consider hedging by adding put options, which however become increasingly expensive on the back of the persistent appreciation in yen.
 
From a technical perspective, the USDJPY is considered oversold, but the stronger momentum is what drives the market on foot of the failure of the BoJ to deliver something new. The next critical support is eyed at 105.18, the Oct’14 dip.