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Traders Wary of 1% Scare in Japan
Written by: PaxForex analytics dept - Thursday, 02 August 2018 0 comments
Japan is traditionally know as a risk averse country which is why the Japanese Yen has always been the go-to safe-haven currency for forex traders around the world. When geopolitical tensions rise or economic uncertainty increases, the Japanese Yen usually benefits as forex traders rotate capital out of more volatile currencies and park them in the Japanese Yen until the situation calms. Given the Bank of Japan’s market interference since the Asian financial crisis in the late 90’s, many corporations have also taken advantage of low interest rates to borrow and expand.
Japan, as a result of market interference has experienced a lost generation and may face its second one. Economic growth has largely been below average, some big corporate leviathan’s either went out of business or were reduced to a fraction of what they once were. Deflation was more a topic at the Bank of Japan than inflation and the Japanese central bank has been stimulating the markets on all fronts for almost two decades. Forex interventions are considered normal, meddling in the corporate and government bond market accepted and even buying Japanese equities is not considered and exotic move as the Bank of Japan now own roughly 80% of the public Japanese market.
Since the 2008 global financial crisis other developed central banks slashed interest rates to near zero and flooded the global financial system with capital in the hope it will spur economic growth. Now the Bank of Japan has adjusted its yield-curve control policy and doubled its tolerance for 10-Year Japanese Government Bonds, up to a level of 0.2%. This resulted in the biggest drop since 2016 yesterday and prompted an emergence margin call from the JGB clearing house. Bond traders expect the yield on the 10-Year JGB to increase further which will also push the 20-Year and 30-Year yields higher. JGB traders are now focused on the 30-Year JGB yield which rose by 12 basis points to 0.84% and within in striking distance of 1%.
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The adjustment to the yield-curve control policy now makes a 1% yield on the 30-Year JGB a very likely scenario and many analysts believe that such an even would result in severe capital repatriations back to Japan. Currently, Japanese investors have parked their cash in the US and France. Both countries may soon face a severe capital outflow as Japanese investors will move their money back home. The US and French economies may see an increase in costs across their markets which would have a wider ripple effect throughout the global financial system. A 1% yield in 30-Year JGB’s could have a devastating impact on borrowing costs, especially as central banks are raising interest rates from crisis lows. Traders wary of 1% scare in Japan should add the following three forex traders to their portfolios.
A repatriation of capital by Japanese traders would put downside pressure on the US Dollar which is faced with a decrease in tax revenues and an increase in spending. The US Fed is increasing borrowing costs in order to have some ammunition to fight the next crisis and is under criticism from President Trump. Price action in the USDJPY has
therefore already completed a breakdown below its horizontal resistance area, attempted another rally which was rejected and a descending resistance level formed. Forex traders are recommended to sell the rallies in the USDJPY from current levels up to its descending resistance level.
The CCI descended from extreme overbought conditions and momentum carried its below the 0 level which completed a change from bullish to bearish. More downside is expected in this currency pair. Follow the PaxForex Daily Forex Technical Analysis and receive all our technical trading set-ups delivered directly into your inbox; never miss another trading opportunity.
This trading recommendation pits the world’s top two safe-haven currencies against one another. The Swiss Franc, due to its high exposure to the commodity sector, will face a spike in selling pressure as the US-China trade war continues to increase in size and scope. The CHFJPY was rejected twice by the upper band of its horizontal resistance area which forced a breakdown and sentiment change. Bearish momentum is set to expand further and should suffice to push the CHFJPY below its ascending support level and into the upper band of its horizontal support area. Forex traders are advised to spread their sell orders from current levels up to the lower band of its horizontal resistance area.
The CCI spiked to the upside after briefly venturing into extreme oversold territory, but has since reversed direction and is currently trading below the 0 mark. As bearish pressures mount, this technical indicator is expected to contract back into extreme oversold conditions. Subscribe to the PaxForex Daily Fundamental Analysis and let our expert analysts guide your through the forex market with monthly profits of 500 pips and more.
A smart hedge to the above to sell recommendations is a buy order in the AUDJPY. This currency pair is at a more advanced phase of price action moves and the bearish trend just paused. It ascending support level sufficed to allow the AUDJPY to stabilize. A minor horizontal support level further increases the odds for a price action reversal back into its horizontal resistance area. Downside risk form current levels remain limited with an attractive, short-term upside potential. Forex traders should place their buy orders just above and below its ascending support level in order to reduce their overall risk profile in this trade.
The CCI bounced higher after reaching extreme oversold conditions, and a push above the 0 level is set to further attract buy orders in this currency pair. Make a deposit today into your PaxForex Trading Account and access the profitable world of forex trading. You can even diversify your digital assets such as Bitcoin and Ethereum and create a stable cash flow from trading forex.