Are All Yen Bets Off?

Is the short bet on the Yen over? Well, maybe not when it comes to trade vs. the Dollar. But as far as other weaker currencies, that's a different story. As it relates to the Euro, then indeed, the long bet on the EUR/JPY might be over. And here's the reason why.

Inflation might be coming back

That's a rather straightforward statement, but the Bank of Japan believes that inflation is inching higher. And while it's not as clear-cut a case a, let's say in the US, still there is a basis for it. When calculating Japan's inflation, excluding volatile prices such as food and energy, inflation gained 0.6%. Now, while that's still low, it's a move in the positive direction.

Moreover, a quick look at the inflation figures per segments and you can see most segments have experienced price increases. That is a mildly hawkish sign. It must be pointed out that the BOJ is about to change the way it measures core inflation. Going forward, the BOJ will publish core inflation figures, calculated both with and without energy prices. However, the BOJ will focus on core inflation excluding energy prices. Previously, by including them, it distorted the inflation figures into the downside.

BOJ wants to put pressure on Abe

It seems there's a growing rift between the BOJ Governor Kuroda and Prime Minister Abe. While Shinzo Abe has promised to deliver three arrows of growth for Japan, the only arrow ever really fired is monetary easing. That leaves the BOJ to carry the burden of reviving the economy alone, with no real help from the Abe government. Governor Haruhiko Kuroda, however, stated that there are limits to monetary policy. In his own way, the BOJ governor fired his own arrow, right back at Abe. The BOJ governor wants Abe to put through more reforms and deliver upon his promise. Only then, will Kuroda consider unleashing more easing. Since reform in Japan move slowly that leaves the BOJ with no choice but to stick to its guns for a while.

Demand for safe havens rising

As the BOJ becomes much less dovish, that will, of course, support the Yen against the Euro. Especially, that is, if Mario Draghi, the ECB president, decides that more Eurozone easing is warranted. But there is also another factor external to Japan. Naturally, it is increasing demand for safe havens which has surged as China's Yuan conundrum sends ripples across markets. Under normal circumstances, the BOJ might have been forced to weaken the Yen further to trail the Yuan. However, under the current dynamics, Kuroda may just keep his resolve and let the Yen gain ground.

Time to Short the EUR/JPY

As the incentive to buy the Yen grows, the prospect of Yen gains, especially against the Euro will rise. If the Yen move against the Euro was already in motion, one might believe there's not enough beef for an EUR/JPY short. Yet, that is not the case. As can be seen in the chart below, this shift in BOJ policy has not yet been priced in. That leaves room for short sellers to gain. How low can it go? That will largely depend on how inflation progresses in Japan amid the China crisis. But the 120 level suggested by the Fibonacci retracement might be a good contender for the upcoming short. Just a word of caution; the scenario for the EUR/JPY is in utter contrast to the USD/JPY. With the USD/JPY pair, the divergence from the Fed is so great that the pair can’t help but move higher.

Chart courtesy of esignal.com

Look for my post next week.

Best,
Lior Alkalay
INO.com Contributor - Forex

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.