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Forex Flash: Political uncertainty in Italy prompts yen short squeeze - BTMU

Lee Hardman, FX analyst at the Bank of Tokyo Mitsubishi UFJ notes that the Yen strengthened sharply yesterday with USD/JPY falling from an intra-day high of 94.77 to an intra-day low of 90.87 as heightened political uncertainty in Italy following the inconclusive election results has triggered a short squeeze.

The Yen has since pared some of its strong gains in the Asian trading session following comments from the Japanese Economic Minister Amari stated that excessive moves in the Yen are not desirable, reinforcing investor expectations that the government will not tolerate a strengthening Yen for too long.

He adds that the sharp scale of the yen’s gains yesterday highlights that the market was caught extremely short yen following speculation over the weekend that dovish candidates Haruhiko Kuroda and Kikuo Iwata are set to become the new BoJ Governor and Deputy Governor supporting the ongoing shift by the BoJ to adopt more aggressive monetary easing in an attempt to defeat deflation and support growth.

He notes that the latest IMM report revealed that speculative yen short positions had increased further last week. Further, he sees that the yield on 10-year JGBs has declined to its lowest level since June 2003 overnight reflecting both a pick up in risk aversion which has supported global bond markets, and increased expectations that additional BoJ monetary easing will result in purchases of Japanese government debt further out the curve beyond the current three-year maturity cut off.

Hardman finishes by writing, “The decline in long-term yields highlights that domestic JGB holders are not as convinced that the BoJ will prove successful in their attempts to reflate the Japanese economy, in comparison to foreign investors with the yen having already declined sharply in anticipation of higher inflation ahead. It has been reported overnight by Kyodo news that the Japanese government plans to submit the BoJ nominations to voting in the Lower House on the 14th March and Upper House on the 15th.”

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