Where’s the bottom for the yen?

FXstreet.com (Barcelona) - The Japanese yen continues its relentless depreciation against its arch-rival, pushing USD/JPY from September lows in the proximity of 77.40 to the very doorsteps of the 83.00 figure, level last seen at the beginning of April.

… Risk and politics

The increasing risk appetite over the past few months has plotted against further strength of JPY. Therefore, outflows from the yen have sharply intensified given investor preference for the safe haven in times of financial uncertainty or prevailing risk aversion.

The late effervescence in the Japanese political arena has also weighted on the domestic currency, starting with the LDP candidate – and most likely next PM – S.Abe blaming the Bank of Japan for not doing enough to quell the entrenched deflation that has been hammering the country for decades. In addition, and reinforcing this idea, the candidate has also included in its policy platform an upward revision of the actual inflation target to 2-3% from the actual 1%, and it is well known his intentions to place a more dovish BoJ governor when M.Shirakawa’s term finishes in April. So this time, it appears that market participants believe that a weaker yen is possible.

However, looking at the shorter term, Derek Halpenny, analyst at BTMU, argues “We suspect a newly elected PM Abe would in all likelihood initially reaffirm his policy intentions in regard to the BOJ and the yen, which may help support USD/JPY and other yen crosses. However, these bold changes will be a while in coming, which leaves this extreme yen short position vulnerable to a squeeze. In four out of the last five years, IMM speculative yen positions returned to close to flat in the final weeks of the year”.

Technically speaking, expert Karen Jones at Commerzbank, remarked that the cross “is sidelined above 81.86/68, the bottom of the recent range. We remain below key resistance at 83.12, this is the 2011- 2012 resistance line. The market last week failed to overcome the 82.84 recent high and looks set to consolidate further, we note that the pattern developing on the chart is a potential ascending triangle and this will complete on a close above 82.84”. The analyst also signaled that the initial support is located at 81.68, which would allow 80.63 if breached.

In addition, the Bullish Percentage Index (BPI), developed by the research team at FXstreet.com, is trading well into the oversold territory (below 30), indicating that only 15% of yen-based pairs are still on bullish mode, according to point and figure patterns.

Ahead in the day, the cross is expected to be under pressure after the FOMC releases its statement, with market consensus forecasting further easing once ‘Operation Twist’ finishes at the end of the year, comprising of outright purchases of Treasuries worth $45 billion to be added to the MBS purchases.

Yen bears should be afraid of any unexpected complications out of the US ‘fiscal cliff’ talks, as this scenario would prompt investors to turn their preference for the JPY. However, the likeliness of this case has been shrinking as of late, according to recent commentaries by US politicians.