Most traders make the mistake of thinking that central banks are omnipotent. The reality is that they are not, and quite frankly are almost always on the wrong side of the issue. For example, the Federal Reserve has spent all of last year telling us that inflation was “transitory”, and we obviously know better now. In 2007, Ben Bernanke told everybody that the housing bubble was not in a bubble. We see how that played out as well.
Last week, the Bank of Japan decided to intervene in the Forex markets, in order to bid the Japanese yen back up. After all, it was getting slaughtered against almost everything out there due to the fact that the Bank of Japan is in the process of buying “unlimited bonds.” This is essentially the same thing as printing unlimited currency. In that scenario, it’s difficult for the currency to be taken seriously, and as a result we have seen a lot of selling pressure against the Japanese yen.
15% of reserves used
The Bank of Japan used 15% of its Forex reserves to buy yen, in order to pick up the currency from the floor. At this point, a lot of new traders get nervous, but the reality is that most of these moves fail, and central banks are not necessarily trying to change the trend, they are simply trying to slow down the yon slide. They have certainly accomplished that in Tokyo, but now it is set up an obvious barrier.
The ¥145 level is an area where a lot of people will be paying close attention to, and it has offered a significant amount of selling pressure. That being said, I think the best way to play this market is to buy pullbacks on shorter-term charts, especially near the ¥142.50 level, and maybe even the ¥140 level. Either way, think of it as “buying cheap US dollars”, and therefore I think it’s probably a situation where you don’t want to chase the trade all the way up here, but there is room to maneuver on shorter time frames. Yes, eventually we could very well break out, but if it’s done in a very chaotic manner, we could see the BoJ get involved again.