After a decade as the weak sister of major currencies, the Japanese yen has greatly strengthened against the U.S. dollar. “There’s not a fundamental reason for this. It’s more a trading dynamic,” says Brian Dolan, research director for Gain Capital. “When risk appetite is strong and high, the carry trade and yield-chasing trades get put on. When risk aversion is high, you see people selling EUR/JPY and GBP/JPY and USD/JPY.” In November, the yen could strengthen to 95.60, but then the Japanese government soon would bid it up to 100. “The Japanese are not going to be happy with their currency strengthening as their exports are crumbling and their own economy is stagnating,” he says.
Jason Yu, chief analyst for ODL Securities, says that with the S&P 500 below 1,000, the Dow below 9,000 and the TED spread at more than 400 basis points, support is 95.73, the March 2008 low and resistance is 104.
“Going long the Japanese yen in the short term is making a bet that this crisis is not going away anytime soon,” says Antonio J. Fernandes Sousa, chief strategist for DailyFX. He says while leverage is returning to its lender, Japan, longer term prospects for the yen are not great. “They are still coming out of deflation. The Bank of Japan is concerned about the economic slowdown, like everyone. We will have some intervention when it gets to 95-96.”