An economy with fragile growth, negative interest rates & bond yields, public debt more than double the size of the economy, and yet the currency appreciates on risk aversion. Welcome to Japan! The BoJ had put lots of efforts in the past couple of years to devalue the currency in order spur growth and meet the inflation mandate, however the 2% target in current low global growth environment is becoming a mission impossible, especially if the Yen holds stubbornly higher against its major peers.

After gaining more than 6% against the dollar in first quarter the Japanese yen climbed to highest levels in almost one and a half year, with USDJPY briefly breaking below 110 on Tuesday in an attempt seemed to test BoJ limits.  BoJ is well known for its intervention in weakening the currency, but the currency war game is getting more complicated as more players entered the game and financial markets volatility taking it to a tougher level.

Despite U.S. non-manufacturing ISM joining Fridays NFP in painting a rosier picture of the U.S. economy, the data was ignored by traders, indicating that most recent Fed’s Chairwoman Yellen speech continued echoing in trader’s ears. In response to the appreciating Yen, Japanese Chief Cabinet Secretary Yoshihide Suga said the government is closely watching changes in foreign exchange values. His speech is perceived as raising alarm bells or “intervention phase level one”, this comes at a time CFTC data showing that speculators drove long Yen positions to highest levels against the U.S. dollar since the financial crisis, making the case for physical intervention a very close call. USD bulls are likely to start building long positions around the current 110 physiological level, however from a technical perspective the strong major support is seen at the 38.2% retracement from 2011 lows to 2015 highs at 106.8.

FOMC minutes on the radar

FOMC minutes will dominate today’s trading session as most Fed members who spoke after 15-16 March meeting provided slightly hawkish tone than the statement itself, only until Fed Chair Janet Yellen appeared at the Economic Club of New York to show the dovish side. Boston Federal Reserve President Eric Rosengren was the latest to say futures markets are wrong, and the Fed likely should hike rates sooner than they imply. Rosengrens’ speech fell on deaf ears and markets continued pricing one rate hike later in the year. The CME Fed Watch tool is showing 19.7% expectations of rate hike in June, 39.4% in September, and 54% in December. Although the minutes are not likely to change the expectations of only one rate hike in 2016, but having these figure moving slightly up will lend the USD some support. 

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