Selling the Yen at Current Zones Is Risky: Here’s Why

Selling the Yen at Current Zones Is Risky: Here’s Why

October 18, 2022 0 By Alicia Hagen
  • USDJPY soars beyond 149 buy market players should watch for BoJ’s potential intervention.
  • Japan’s increasing inflation might catalyze a reverse in BoJ’s financial policy.
  • JPY’s end-of-year take profit remains risky.

2022 saw the Japanese yen tumbling. The USD-JPY has been relentless since overcoming the stiff resistance at 116, now threatening to climb beyond 150. That means shorting JPY dominates the trading year.

Though the rally enticed market players, the yen short trade appears fishy around current levels. That’s the narrative for the USD-JPY exchange rate, which triggered the initial Forex market mediation by the Bank of Japan (BoJ) – in 1998.

Here is why 2022 is no longer ideal for selling the yen

  • The BoJ isn’t happy with JPY’s rapid depreciation.
  • Japan sees inflation picking up.
  • End-of-year profit booking.

The BoJ Ready to Intervene

The BoJ arbitrated in the financial markets last month. The central bank sold United States dollars and purchased Japanese yen. Meanwhile, that move catalyzed massive volatility in JPY’s exchange rates. The intervention sent USD-JPY from 146 to 140 within no time.

Now that the currency’s exchange rate hovered beyond 149, the question remains, at which level is the BoJ likely to intervene? Either way, shorting the Japanese yen here has the risk of battling the Bank of Japan, one of the most aggressive banks globally.

Japan Inflation Picking Up

The BoJ remains the only leading central bank to maintain financial policy at ease as others tightened. Thus, JPY’s 2022 slump makes sense from a rate differential standpoint. The Bank of Japan resorted to a different approach to build inflation. The bank has battled inflation over decades, and the current environment seems ideal to attain.

It somewhat achieved it, according to price surges at leading Japanese restaurants. Thus, shorting JPY remains risky as the central bank can shit its course amidst surging inflation.

End-of-Year Profit-Booking

Lastly, traders should remember the end-of-year profit booking. Imagine individuals that sold the yen early in the trading year. Meanwhile, profit-taking will pressure JPY pairs as we approach the 2022 end. The currency might see its rally stall as we near the trading year’s end.