Trading the Bank of Japan’s Anticipated Intervention

(eToro Blog) Following the Fed’s easing announcement yesterday (an intervention of a sort, in and of itself) which effectively and broadly weakened the U.S. Dollar, currency traders are wary and watchful of a possible Bank of Japan intervention. The USD/JPY pair jumped to a 7-month high in the overnight hours, surely to the chagrin of Japanese policymakers who are still trying to resurrect the Japanese economy following the 2011 earthquake and tsunami.

Many novice traders will shy away from the USD/JPY pair (as well as other Yen crosses, for that matter) for fear of being caught on the wrong side of the trade but it is possible to profit from an intervention. Traders can take advantage of an impending central bank move by opening a position in advance of the intervention and closing it quickly once the after-effects lose momentum; this is when it’s important to put your TP and SL in place or carefully monitor the trade and watch for a momentum shift before your profit erodes.

The central bank may try to be circumspect and avoid tipping their hand, but fortunately, in this cyber world where everything is interconnected and news is immediate, the business media will often put a trader on high alert that an intervention is probable, as is the case today. According to the Dow Jones, the BOJ checked the USD/JPY rate during the N.Y. trading session, seen by many as a typical precursor to an intervention. The Bank of Japan is notorious for currency interventions, buying and selling the Yen by the billions (in USD) to control the Yen’s value. They haven’t intervened in nearly a year, but last October’s intervention to curtail the Yen’s rise was equivalent to $13 billion.

In the absence of a media alert, there are often indicators which suggest an intervention is imminent; for example, an intervention will typically occur around the price level of a previous one. Sometimes the comments made by a government official will be the tip off, though they could also be a ruse just to sway trade direction.

An impending intervention can present an unusual opportunity for currency traders, but because they are a prediction and not a certainty there is some risk, and a trader should be cognizant of the fact that the trade may have to be held open for a longer period than he is able to sustain. Currency experts recommend that traders maintain a good money management plan and use very low leverage.

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