The Yen repatriation trade appears to be back in play

The Japanese yen has surged higher during today’s Asian session, and whilst it is hard to pinpoint the exact reason it may be a combination of factors. Given that sentiment has improved thanks to US authorities providing further support for regional banks, we’d have expected the yen to remain on the ropes like it had overnight. But that is not how today’s session has played out.

Fiscal stimulus and fiscal year end appear to be key drivers of the yen strength

Earlier in the session we heard Japan’s Finance Minister announce a  ¥2.2 trillion stimulus package from the budget reserve, and as that is inflationary then it puts upwards pressure on the BOJ to move away from their negative interest policy sooner than later.

But we could also be witnessing the Yen repatriation trade, where large corporations move funds back to Japan ahead of the end of the fiscal year on March 31^st. It’s also possible the announcement from the Finance Minister prompted some firms to move funds over sooner, and that still leaves over three more trading days left in the financial year for other forms to follow suit. Overall, traders may want to err on the side of cautions being too short the yen despite the pickup of sentiment, as the repatriation of funds combined with the usual month-end flows can make for some tricky price action.

How markets are reacting

The yen is the strongest major and trade higher against all its major peers. USD/JPY is close to handing back all of yesterday’s gains. Although it is trying to build a base around 130.50, around a series of previous swing lows.

We note that RSI (2) is overbought which warns of a near-term inflection point, and the retracement on USD/JPY is relatively deep compared with the US-JP 2-year yield. SO we see the potential for a bounce from current levels, but whether it turns out to be a minor rebound ahead of a break to news lows or a more significant rebound remains to be seen.

AUD/JPY 1-hour chart:

AUD/JPY has only pulled back slightly from yesterday’s highs – and is likely supported by the underlying risk-on tone seen yesterday. It is trying to form a bullish trend on the 1-hour chart, although the 87.58 low and 100-bar EMA are capping gains. A break above 87.60 assumes bullish continuation, whilst a break beneath the 87.15 low (or 87.00 handle to be safe) assumes the trend has reverted to the downside.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge