LONDON: There is every reason for the Japanese yen's slide against the dollar to continue even with the exchange rate above 101 yen but it may be a gradual slither rather than a straight line move.
The severity of Thursday's break above 100 yen to the dollar was exaggerated as many traders had squared up previously-held positions given that the greenback had repeatedly failed to breach the psychologically and technically significant level.
Traders were then forced to go back into the market and buy dollars at levels well above 100 yen in order to jump on a train that was already gathering speed, fuelled by a plethora of loss-limiting orders to buy greenbacks once the yen fall accelerated.
The net effect may be that interbank traders, and possibly even hedge funds, who admittedly were quick to realise that the yen was on a downward spiral from late 2012, are now running long of dollars with position entry points well above 100 yen.
The risk is of a setback in the dollar's fortunes that could see the pair fall back towards 100.50-80 yen to the greenback, forcing some who have gone long of dollars to liquidate.
But while a move away from a straight line push towards 105 yen to the dollar might be painful for some, it would be an opportunity for anyone expecting renewed yen weakness, but who has yet to place some or all of their bets, to buy the US currency.
None of the factors that underpinned yen weakness have disappeared.
The economic policies of Japan's Prime Minister Shinzo Abe, often referred to as Abenomics, are still only partially implemented and go hand-in-hand with the Bank of Japan's still unfolding "shock and awe" approach to monetary policy.
The weakening yen may be driving up the cost of Japan's dollar-denominated fuel imports but if that prompts domestic inflation pressures, that may suit an Abe government trying to break Japan's cycle of deflation.
The penny may be dropping with Japanese investors that yen weakness is here to stay for a while.
Japanese investors turned net buyers of foreign bonds in the last two weeks in keeping with the notion that Tokyo's drive to reflate its economy would result in money leaving Japan in search of higher returns.
Good US employment data suggests the US economy is ticking along better than many others and has helped push up US Treasuries' yields , making them more attractive to Japanese investors.
Finally, the geopolitical interests of Japan and the United
States remain aligned. If boosting Japan's economy necessitates continued yen weakness, Washington will likely accept it without too much demur.
The meeting of the Group of Seven finance officials raised no direct criticism of Japan's efforts to beat deflation and their impact on the exchange rate. Having urged Japan for years to boost its economy, they were hardly in a position to do so.
The macro arguments for a continued slide in the value of the yen remain intact but with so many traders only having re-entered the position above 100 yen to the dollar, there may need to be a yen rally before the fall gathers fresh steam.
A snaking move to 105 yen to the dollar in the next month is very possible.
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