Saturday, July 17, 2010

The Debts of the Lenders: How Much Further Can the Yen Rally?

The Yen has been on a wild tear in recent days, notching impressive gains against the dollar on safe haven flows. Additionally new laws on Japanese leverage limits are imposing margin calls on speculators.

The introduction of leverage caps on foreign exchange margin trading in Japan in the coming month is likely to place pressure on the Australian dollar/yen cross rate, according to research by the Royal Bank of Canada.

The Japanese regulator will impose a cap of 50 times leverage on collateral for margin trading at the start of August to curb currency speculation by retail investors. The cap will be further lowered to 25 times from August 2011.

So, where does support and resistance lie? There is still further room for a rally. Up to 85 or 118 on the corresponding $XJY index which closely matches the CME and Globex price quotes. This represents the currency's 14 year low which was reached late last year.

At these levels, it is likely that the BOJ will take steps to intervene. The bank has already released official statements that they are watching the situation closely.

July 15 (Reuters) - Bank of Japan Governor Masaaki Shirakawa said on Thursday he was continuing to watch currency and stock price moves carefully.

"Yen rises hurt exports short-term while stock price falls have a negative impact on capex and consumer spending," Shirakawa told a news conference.

"While the yen's rise and stock price falls may affect Japan's economy I expect it to remain on a recovery trend."

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