Weekly FX Review - 20 December

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The major move in FX this week has been the surprise move by the Bank of Japan to widen the band it has placed on the 10-year JGB yield. Previously they intervened in the market to keep yields in a 50bp band around zero. However, in an expected announcement they have doubled this band to a 100bp around zero.

Allowing the 10-year yield to move rapidly above 0.25% and up above 0.4% and up to levels not seen since 2015. This caused the yen to fall as much as 3% overnight, a very significant move for a major currency. Will this major move affect the underlying trends?

The weekly chart included details how the yen has moved from pandemic lows of around 100 in 2020 to highs just above 150 earlier this year The retracement levels calculated over this move could prove useful. As the 3% fall has pulled price action down towards the 38.2% area, of 133. Moves under here and we can immediately see many in the market start to talk about a 50% retracement down towards 122.

Depending upon how much consolidation we see in the next few weeks, any such break under the 133 area could also trigger concerns of a major head and shoulders reversal, as the 133 could be considered as the neckline.  This also would have serious downside implications.

So the 133 area will need to hold in the next few days/weeks if the bullish moves up from the pandemic lows can maintain control. As with any moves under 133 we would expect arguments to increase that the fundamental and technical picture on the currency has turned more bearish.