USD/JPY, AUD/USD, USD/CNH: Fading intervention that fails fundamentals

Any attempt to support the Japanese yen through direct market intervention is unlikely to have success beyond the short-term when the fundamentals are so strongly working against it. But that’s unlikely to deter Japanese government officials from ramping up the intervention warnings after USD/JPY surged to 11-month highs on Monday, corresponding with the spread between US and Japanese 10-year bonds blowing out to over 380 basis points, the highest level this year.

Intervention may provide better entry levels for long USD positions

Unless spreads narrow meaningfully between the US and Japan – either by markets collectively rethinking the outlook for US monetary policy or the Bank of Japan unexpectedly removing yield curve control, both of which appear extremely unlikely in the short to medium term – it suggests verbal and direct intervention will provide opportunities for traders to enter long USD positions at better levels with an eye to fading knee-jerk initial reactions.

The difficulty in predicting the reaction in USD/JPY is you cannot say with any certainty if the Bank of Japan (BOJ) will intervene on the government’s behalf. And, if it does, how much the JPY would need to strengthen by before it is satisfied with the results? I know other analysts have looked at past episodes of BOJ intervention, but I’m not convinced that what happened previously will be useful for what may happen on this occasion. Instead, looking at where support is located on the charts may help determine which levels provide decent risk-risk reward for those seeking to fade the initial market reaction.

USD/JPY support levels to watch

On the daily, 145.00 has acted as a support and resistance zone in recent months, suggesting this level should be watched closely as a potential entry level. Further down, the pair has also done quite a bit of work either side of 142.00, providing another zone to watch for a potential entry point.

Any intervention beyond this would be unlikely given it would risk the wrath of policymakers in other monetary jurisdictions. Given the firepower possessed by the BOJ, traders considering fading a direct intervention move should ensure their position sizing and stop levels have been evaluated thoroughly, including looking for signs of relative stabilisation in USD/JPY.

While the reaction in USD/JPY is likely to the most acute, intervention to support the JPY would likely support other currencies against the USD, especially those which have large short positions against them or have suffered large falls during the latest episode of US dollar strength.

AUD/USD pops provide opportunities to fade

AUD/USD is one pair that immediately spring to mind. On the topside, it has struggled above .6500 recently, trying and failing on four separate occasions to break above this level over the past six weeks. Above there, just below .6600 is another zone to watch given this previously acted as support for several months earlier this year.

USD/CNH another candidate for knee-jerk reaction

USD/CNH is another pair that been largely one-way traffic of late, providing another option to reset USD longs should we see another intervention episode. It found plenty of bids below 7.1500 earlier this year, suggesting that may provide a decent entry level. Further down, a more pronounced support level is located at 7.0000.

-- Written by David Scutt

Follow David on Twitter @scutty

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the market you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.