Laurence Balanco, a noted chartist at CLSA, expects a potential correction on benchmark Nifty50 index if the Japanese Yen breaks below the crucial support level of 137-138 to the US dollar. The yen's strength could affect risk assets globally, and net short positions by speculators could lead to a squeeze if the adjustment occurs, said Balanco in an interview with CNBC-TV18 on July 28.
At 2:30 pm on July 28, the yen was trading at 139.45 against the dollar and the Nifty 50 Index stands at 19,598.95.
Balanco believes that the Nifty may face a correction if the Yen goes lower than the support levels. “As you saw the reaction overnights, the yen strengthening did coincide with risk assets being sold off. So if we do get that adjustment and the yen breaks below, we could see a deeper correction across risk assets, including the Nifty through the session this afternoon,” he said.
The Yen is used as a carry trade for risk assets across the globe. Balanco highlighted that an adjustment in the yield curve control will push the Japanese currency below its key support. “I think it is critical to watch that yen and the 137 to 138 area,” stated Balanco.
On July 28, the Bank of Japan announced plans to loosen its grip on the bond yields and keep the 10-year target for government bond yields at around zero percent. BoJ Governor Kazuo Ueda stated that the bank has turned the 0.5 percent ceiling into a reference point instead of a strict limit. However, after this move, the Yen lost its previous gains and decreased against the US Dollar.
Balanco noted that looking at the price action, the charts show that speculators are still net short the Yen at over 40 percent of total open interest. This indicates that a large portion of speculators are expecting the value of the yen to decrease relative to other currencies in the future. The market veteran believes that if there is any adjustment, the risk of those short positions being squeezed out of the Yen is significant.
“I think it is a space that you need to watch carefully with that one-sided trade in place,” he said.
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