The US dollar continues to find buyers on dips against the Japanese yen despite recent intervention.
USD/JPY
The US dollar has fallen initially during trading on Thursday again, but just like we've seen over the last several days, buyers are willing to come in and test the Bank of Japan as the carry trade still favors the US dollar by a massive margin.
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Furthermore, the Bank of Japan has a major issue structurally speaking. They could raise rates, that would be fine. It would wreck the economy of Japan, though. The debt load is just simply too much. Japan has a major problem in the sense that it can choose between paying its debts, keeping the currency cheap—in other words, inflating in a way—or watching the currency strengthen, and then you have the issue where that would take higher rates, and that becomes an impossibility.
So really at this point in time, the Japanese are stuck, and in fact that's part of the reason why the Americans had to help bail them out. This has happened a couple times in the past. The tsunami that hit Fukushima years ago was one such example.
Carry Trade Support and the Bank of Japan Dilemma
So now we find ourselves in a situation where carry traders are willing to come in and pick up dips, and that's become obvious over the last couple of days, and we'll have to see what the central banks do. This all ties in to the bond markets because there's also concern that maybe the Japanese will have to start selling Treasuries to defend their own currency.
I think the goal of the central banks, and this is typically the case, is to slow down the move, and that's really the main idea here. It isn't so much about the idea of the yen shrinking, they just don't want it to shrink too rapidly.
I remain a buyer of dips, have been in this for months, have been adding along the way in little bits and pieces, building up a larger position. A break above the 160 yen level gets a little interesting. We'll see what the Bank of Japan thinks about that, but right now, it certainly looks like we'll try to test that.
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