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Busch: Japanese Yen Scenarios

Japanese 10,000 Yen bank notes
Luc Novovitch | Photographer's Choice | Getty Images
Japanese 10,000 Yen bank notes

Given the Swiss National Bank's pegging or linking their currency to the EUR, the market is now starting to believe that the Bank of Japan could do something similar with the Japanese yen.

Given the Swiss National Bank's pegging or linking their currency to the EUR at 1.2000 (+10% from spot), the market is now starting to believe there is a possibility that the Bank of Japan will do something similar with the Japanese yen.

The new Japanese Finance Minister is expected to present his plan to the G7 this week. Friday on CNBC's Money in Motion, I outlined a playbook on Japanese intervention and what it may look like going forward. Here is the reasoning and the trade from the segment.

Playbook Bank of Japan

  • September 7th is the next meeting date.
  • Overnight target rate is 0.1%.

On August 4th, the Bank of Japan expanded its asset purchase program from 40 trln to 50 trln yen.

With the exception of August 19th, the USDJPY has stayed above 76.50 for the entire month of August, despite a massive drop in global equities and heavy risk-off trading.

How is this possible? Clandestine intervention is the likely answer.

Here are three scenarios for what may occur in the future relating to intervention:

  • If this covert policy ends under the new Japanese government, then you want to buy Japanese yen and sell US dollars.
  • If this covert policy continues, then sell Japanese yen and buy Swiss francs.
  • If the BOJ begins an overt policy to buy US dollars like in 2004, then you want to buy US dollars and sell Japanese yen.

I believe at some point in the near future, overt intervention will eventually drive up the value of USD against JPY.

When this occurs, we'll use the third scenario and approximate a trade from today's current levels. While this may appear to be obvious, the concept is for a surprise of sustained and overt intervention that is not priced into the level of USDJPY now. Review the price action from Q1 2004 on USDJPY for reference on how this current trade may look should it come to pass.

Buy USD/Sell JPY

  • Entry 76.50 (wherever current spot will be under this event)
  • Target 82.90 (about 8.5% similar to Q1 2004)
  • Stop 75.50
  • 6.4:1 return

Again, like the Swiss National Bank, the intervention must be massive and sustained over time or the action will fail to generate sustained upside for the US dollar against the Japanese yen.

Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a contributor to CNBC's Money in Motion Currency Trading.You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch .

Tune In: CNBC's "Money in Motion Currency Trading" airs on Fridays at 5:30pm and repeats on Saturdays at 7pm.

Learn more: The essential vocabulary for currency trading is on Key Currency Terms. Top strategies are broken down for you in Currency Class.

Talk back: Tell us what you want to hear about at moneyinmotion@cnbc.com.

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