Currency traders are watching amazing moves in the Yen today as shown in following chart 10-minute chart.

Yen 10-Minute Chart

click on chart for sharper image

The Yen spiked over 4 cents in little over 10 minutes. It is now well below the opening spike. This can easily be an exhaustion gap, but it may takes weeks to know for sure.

Fundamentally there is absolutely no reason to like the yen here except for short-term repatriation moves.

Carry Trade Blows Sky High

Bloomberg reports Yen Reaches Record High Against Dollar on Repatriation Demand

The yen rose to a post-World War II high versus the dollar as risk of radiation leaks from crippled nuclear plants in Japan added to speculation insurers and investors will redeem overseas assets to pay for damages.

“Speculators are becoming increasingly confident about pushing the currency pair around,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., the world’s largest custodial bank, with more than $20 trillion in assets under administration. “Everyone is curious to find out why they chose not to defend the 80 level. Wow. That’s all I have to say, just wow.”

“We’ve breached 79.75 and there was enormous support there initially and that’s given way with stop losses on a New York close in extremely thin conditions with absolutely no signs of the Bank of Japan and the selling has just snow-balled,” said Kurt Magnus, executive director of currency sales at Nomura Holdings Inc. in Sydney.

“There are real concerns that if it’s a disorderly move down in dollar-yen, the BOJ may start to intervene,” said Paresh Upadhyaya, head of Americas G-10 currency strategy at Bank of America Corp. in New York. “This time around there will be support for unilateral intervention. In order for Japan to regain competitiveness, they need a weaker yen. They can now build an economic case for that.”

In an attempt to slow the yen’s 15 percent appreciation last year, the Bank of Japan sold 2 trillion yen ($25 billion) in Sptember in the nation’s first currency market intervention since 2004. Governments and central banks intervene by selling or buying currencies to influence prices.

The yen may continue to strengthen as investors unwind carry trades amid reduced demand for assets from higher-yielding countries. In a carry trade, investors borrow where yields are low, such as in Japan, to fund purchases in higher-returning countries.

The carry trade of borrowing in yen and selling it to buy the currencies of Australia, Norway, New Zealand and Brazil has lost 45 percent this month, according to data compiled by Bloomberg. That compares with a loss of 22 percent using the U.S. currency and return of 8.3 percent in the yen in January and February.

Foolish Cries For Intervention

Please consider G7 to discuss Japan on Thursday as yen soars

The Group of Seven rich nations will discuss on Thursday possible steps to calm volatile financial markets roiled by fears about the deepening crisis in Japan.

A French government source said earlier on Wednesday that the telephone talks would take place before the weekend.

In a sign of the degree of concern among top policymakers, one G7 central banker, who asked not to be identified, said he was “extremely worried” about the wider effects of the crisis in Japan, the world’s third largest economy.

“I think the world economy is going to go right down and it has happened at a time when financial markets are still very fragile,” he said.

The dollar fell more than 4 percent against the yen to as low as 76.25 yen on trading platform EBS, breaching a previous record low of 79.75 set on April 19, 1995.

“Apart from intervention, there isn’t much to stop this slide, and the dollar doesn’t look like it’s coming back soon,” said Brian Dolan, chief strategist at in Bedminster, New Jersey.

Best Move for Japan is to do Nothing

Currency intervention has not worked ever. Pray tell what good did it do Japan to throw $25 billion at the Forex market in September?

The answer is none.

History has proven time and time again that fighting currency trends is futile. Thus, the best thing Japan can do with the Yen is to not do anything at all. Yet, foolish cries for intervention still persist.

If that gap fills quickly with no intervention from the Bank of Japan, the blast higher is quite likely to be an exhaustion gap, signifying the end of the trend.

Mike “Mish” Shedlock
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