The FX market‘s volatility has reached extreme levels in the last couple of trading days. On Friday, just a few hours before the market closed for the weekend, the Bank of Japan (BOJ) intervened again in the FX market to support the yen.
It is the second time in the past few weeks that the central bank sells dollars and buys yen to stop the currency’s rapid depreciation. Interestingly, buyers emerged every time as the USD/JPY exchange rate bounced back to the highs.
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Historically speaking, central bank interventions do not work in the long run. However, they severely impact the market’s volatility and are powerful enough to stop a trader from a position.
At one point last week, there appeared to be no buyers for the JPY. After it broke above 150, the USD/JPY exchange rate climbed rapidly with no pullbacks, but the BOJ intervention changed everything.
In a matter of minutes, the exchange rate dropped more than five big figures (i.e., one big figure equals 100 pips), a massive move for the FX market. But even so, the technical picture remains unaltered, as buyers emerged and pushed the pair back towards 150.
Rising wedge pattern still not broken despite BOJ’s efforts
Despite the central bank’s interventions, the technical picture remains bullish. Sure enough, a rising wedge pattern shows a potential reversal, but the pattern is not broken.
To be considered complete, the market needs to break the lower edge – which it didn’t. Therefore, the bias is that the price action remains bullish while inside the wedge, and only a drop below 140 would put bears in control.
What does the BOJ want to achieve?
The rapid currency depreciation is unwelcome, and the BOJ wants to stop the process temporarily. By selling US dollars and buying yen, the central bank aims at calming down local markets and the public’s sentiment that the yen is collapsing.
Credibility is very important in central banking, and the BOJ appears to have lost it, given it is the only major central bank not to tighten financial conditions. To restore it, the BOJ prefers to intervene in the market rather than tighten financial conditions.
All in all, the USD/JPY’s bullish trend remains intact. Perhaps we will see some profit-taking toward the end of the trading year, but one thing is sure – the 146-150 area is the one the BOJ intends to defend.
Time will tell if it succeeds or not. For the moment, though, buyers emerge on every dip.
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