The resurgent yen has hit a level that has traders wondering if a technical rebound may turn into a rally that derails the foreign exchange world¡¯s favorite short.
The Japanese currency climbed more than 1% Friday, rising for a third day in the wake of the U.S. Federal Reserve meeting, as reduced expectations for rate hikes caused hedge funds to cover short bets from one of the biggest global macro trades of the year.
The cost to buy one dollar with yen has now dropped close to 5% from a mid-July high to below its 50-day moving average ¡ª a key support level watched by traders currently around ?134.27. That paves the way for a decline toward ?130, putting calls that the dollar-yen pair was destined to hit ?140 firmly in the rearview mirror.
¡°The 50-day moving average has served as a support in the dollar-yen¡¯s rally from March and is quite significant,¡± said Akira Moroga, manager of currency products at Aozora Bank in Tokyo. ¡°Since a clear break below the 50-day moving average puts the June low into sight, players are likely to be cautious.¡±
On Friday, end-of-month buy orders for the dollar were competing with fast-money funds still liquidating their long greenback positions, according to Asia-based currency traders who asked not to be named as they are not authorized to discuss client activity publicly. The yen was 0.5% higher at ?133.56 per dollar in the European session.
Expectations for a less aggressive Fed have led to a rally in U.S. Treasuries, narrowing the yield gap which had opened up between Japan and the U.S. that helped push the yen to a 24-year low. That has weakened the argument behind sell-the-yen strategies and eased pressure on the Bank of Japan, which reaffirmed its commitment to rock-bottom interest rates last week.
¡°With U.S. yields falling back to 2.6% from a high around 3.5%, momentum is lost for dollar-yen to test ?140,¡± said Moroga. ¡°The environment has changed from before when dollar-yen was rallying; the current U.S. 10-year yield does not back the pair at ?140.¡±
Still, the yen is not out of the woods yet with some market participants saying it is too early to call an end to declines with the path for interest rates very much data-dependent.
¡°ISM, payroll and inflation data are coming and there will be a lot of opportunities for official remarks ahead of Jackson Hole,¡± said Teppei Ino, head of global markets research at MUFG Bank, referring to the Fed¡¯s annual symposium in August. ¡°If the tone is given at Jackson Hole that rate hikes are coming close to an end, that will be a deciding blow. But we still can¡¯t bet on it at this moment.¡±
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