USD/JPY Spiking Following Reports of North Korean Shelling

USD/JPY is spiking higher on reports that North Korea had fired artillery shells near the Western border with South Korea. Looking at the price action, the dollar apparently became again the preferred safe haven currency, at least for now.

A decline in US bond yields later on Monday (mirroring a rise in global risk aversion) had only a limited impact on USD/JPY trading, which was locked in a tight sideways trading pattern in the mid 83.00 area.

The pair closed the session at 83.33 compared to 83.55 on Friday evening.

Today, Japanese markets are closed and Asian equity markets are deep in negative territory.

After the Mid-September interventions, USD/JPY trading became for some time a tactical game between the BOJ and the market. In this game, the BOJ was in no comfortable position. Its G20 partners were growing very sensitive to the value of currencies and any (perceived) manipulation of the currency could become a source of friction. So, investors felt comfortable with yen long positions (USD/JPY shorts) as Japan was considered to have little room of maneuver to execute a strategy of aggressive interventions to stop the rise of the yen.

However, recently the global decline of the dollar shifted into lower gear. Until early November, any uptick in USD/JPY was seen as an opportunity to offload USD long exposure. The 82.00 resistance area was a hard nut to crack, but finally, the break succeeded.

The rise in US bond yields was the main driver behind the move. This improved the ST technical picture in the pair. In addition, Japan is still loosening its monetary policy while other Asian countries are tightening or preparing to tighten their policy. This might gradually become a yen negative factor too.

We don’t expect a major U-turn in USD/JPY. Nevertheless, there was apparently room for a repositioning in a unidirectional positioned USD short/yen long market. We still look to sell into USD strength, but wait for a technical signal that this correction has run its course. The pair regaining 83.79/99 area (previous highs) in a sustainable way would further improve the picture.

So, we don’t row against the tide and look how far this correction can go. 84.83 (previous low) and 85.94 (post intervention spike) are the next high profile ‘targets’ on the charts (cf graph).

Content provided by: KBC Bank