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Mid & Long Term

The Japanese Yen - The Great Bet

Tuesday, November 22, 2011 3:00 PM GMT

There is a great interest in the rate of the US$ versus the Japanese ¥. At the end of October, after a constant falling of the US$ against yen, the rate found itself at the historical lowest level of 75,55. The intervention from BOJ, which at that point of time was pretty much expected, brought the rate again above the 79,00 level. For the time being, the rate stands in levels that had never reached since April of 1995. Both JPY and CHF, are the most gainful currencies during the last 3 years, due to the 2 consecutive crises that wounded the global economy. The first crisis burst out mostly because of the toxic bonds, linked to the mortgage-backed loans, held by US banks. The second one, was caused by the world debt crisis, which leads to great concerns about its potential consequences.

Nevertheless, the strengthening of a currency can’t last forever. Last months, there have been lots of reports from Japanese officials regarding the JPY undesirable levels . However, their actions such as this of 30th October, had limited impact. This behavior depicts that BOJ doesn’t want a further strengthening of its currency and simultaneously doesn’t want to bring it back to much higher levels, like SNB. Furthermore, we should bear in mind that the intervening capacity of BOJ is much bigger of SNB.

An intriguing scenario which may be extremely interesting, is the BOJ reaction to a potential break of 70,00 levels. In this case, on my own belief, there will be increasing probabilities to observe a BOJ behavior similar to the SNB one. That means, that there will be an intervention of great impact and the rate will gain 1000-2000 pips, touching the 80,00-90,00 level.

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