The Yen Stands Fast

• Japan shocks investors

The yen weakened further on Wednesday shortly after the Japanese authorities revealed a shockingly larger-than-expected $265 billion stimulus packages.

Anticipation for ‘helicopter money’ in Japan is justifying the need for more scrutiny from investors, especially from those actively trading the USDJPY pair, as the currency pair has been one of the most interesting in the Market since this year.

Last Friday’s Bank of Japan meeting was expected to produce evidence that an aggressive plan has been put together to bring back economic growth and revive inflation. Traders believe that any disappointment coming from the BoJ would most likely leave the markets flooded with investments that would mostly profit from the yen’s misfortune.

The yen has fallen by almost 14% to the dollar this year, this slump makes the yen the best-performing currency amongst all majors also complicating all efforts by the Japanese authorities to restart growth. The currency pair has moved haphazardly this week mostly as a result of confusing speculations about Japan’s plans, including rumors that the authorities plan on using “helicopter money” to stimulate the economy.

“There’s huge scope for disappointment,” said Steven Englander, head of G-10 foreign-exchange strategy at Citigroup Inc. “If they lowball the market, the market would say they’re trying to make a gracious exit out of the stimulus business.”

A major worry for traders is that a shift in the yen would easily escalate if investors begin to employ a well-known trading strategy called the carry trade; this strategy utilizes the borrowing of currencies that pose lower risk rates like the euro or yen to acquire a currency with higher risk rate like the Aussie dollar, with the idea that if a gap exists between the two in future the trader will profit.

Anticipation for monetary policy with a bit more leeway combined with record-low bond yields have restored interest in the high yielding carry trade strategy in the last few months.

With a major surge of inflows witnessed in ETFs that employ the carry trade method. Analysis made by Morningstar Inc. reflects that the PowerShares DB G10 Currency Harvest Fund, gained a net of $18.8 million in June, the fund’s highest inflows since March 2015.

Mark McCormick, the North American head of forex strategy at TD Securities in Toronto stated that, "We have some headlines that the stimulus could be a little bit higher than people had been anticipating, and that's been dovetailing with what the expectations are around the BOJ."

The Japanese ministry have also debunked a report by the Wall Street Journal on Wednesday that claimed the Japanese authorities are considering the issuance of 50-year bonds for the first time to make the most of record-low interest rates.

"We have had a lot of volatility driven by the different reports this morning, the bigger issue for the market is how this program is going to be financed. So far it looks like the Bank of Japan is not ready to do something new and that leaves the potential for more downside for the dollar before the meeting on Friday," Commerzbank currency strategist Thu Lan Nguyen said.

With a shocking move into negative interest rates in January and later with a lot of reluctance to ease policy at April and June policy meetings Japan has surprised investors many times, right now no one knows what to expect.