How Far Can The Yen Fall?

A couple of weeks ago I wrote an article alerting currency traders to the massive consolidation pattern forming in the Japanese Yen futures.  We seemed to have gotten the breakout earlier this week and confirmation of the move today, take a look at the chart below:

Since bottoming out in mid-May, the Yen has been in a major coiling pattern as the market took a breather from the huge move lower during the first half of the year.  I mentioned in that article two weeks ago that although the path of least resistance was down – it may be best to play the impending breakout with a long straddle or strangle as the move would most likely be triggered by the near-term global monetary policy.  With statements scheduled to come out within a week of that article from the US Fed, the ECB and the first non-farm payrolls number released in a couple of months – getting positioned with a big directional bias in either way would have been an exercise more in blind guessing than in trading.

Fast forward to today and we have a lot more information on the table.  Although there were no fireworks to speak of with the Fed statement at the end of October, the ECB announcement last week was anything but status quo.  Unexpectedly, the ECB cut rates 0.25% – sending the Euro sharply lower.  Moreover, this move was bearish for the Yen as well.

The increasingly dovish monetary policy from central banks (namely, the US Fed and the ECB) is throwing a wrench into the plans of the BOJ.  It’s no secret that devaluing the Yen is of great benefit to Japan’s domestic economy – which is why the BOJ implemented an unprecedented QE program of their own earlier this year.  Up until recently, it seemed that the BOJ was content with the current program – with most analysts expecting a modest increase in their current QE sometime in mid-2014.  However, the monetary policies of the Fed and the ECB are making it increasingly difficult for the BOJ to meet their inflationary target of 2%.  In addition, the value of the Yen relative to the USD and the Euro will most likely remain strong unless steps are taken by the BOJ to increase their own current QE program.  In my opinion, the only course of action available to the BOJ is to act boldly – and act sooner rather than later if they are sincere in their desire to meet their 2% inflation target in the near future.  If that bold action is taken, we could see another substantial leg down in the futures price.

Questions or comments?  Need help setting up the trade?  Contact Trent directly at 312-756-0932 or at twagner@tradewithfox.com.  For a free trial of Trent’s newsletter, The Weekly Options Trading Report, click on the link below and select “Options Newsletter” from the dropdown box in the subject line.

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*Past performance is not indicative of future performance.  Trading futures and options involves substantial risk of loss and is not suitable for all investors.