The Japanese yen is one of the most interesting currencies to trade due to Japan’s relationship with the United States. This relationship is most notably seen in the USD/JPY pair. Although the US dollar (NYSEARCA:UUP) has been on an upward trend; it has peaked from its highs and is facing pressure against many currencies – but most notably the Japanese yen.

USDJPY is in a downtrend. Look at the hourly chart:

Now look at the daily chart, cropped bottom right:

Note the support; several candles down are followed by positive bars, and then more down candles. While there is support, if you take a look at the hourly trend, the daily trend, it looks like USDJPY could break lower here.

CurrencyShares Japanese Yen Trust (NYSEARCA:FXY) Chart:

FXY data by YCharts

*Note that in the above FXY chart, yen (JPY) is represented in the inverse. USDJPY is a currency pair; when USDJPY is down, it means that the US dollar is down and the Japanese yen is up. If the chart is up, it means the Japaneseyen is up. To bet that the Japanese yen will continue this trend, investors should go long .

FX Street analysis:

Downward potential increases. The Japanese yen appreciated further during the past Asian session as local share markets plummeted, fueling demand for safe-haven assets. The USD/JPY fell down to 110.25, a level not seen since October 2014, and the following bounce was unable to reach the 111.00 figure, despite the BOJ offered its usual jawboning: chief cabinet secretary Suga said that authorities are watching FX movements with a “sense of urgency.” The pair has corrected extreme oversold readings, but maintains a strong bearish tone, both short and long term, indicating a strong possibility of a break below 110.00, which may fuel the decline, despite the BOJ. The 1 hour chart shows that the price is well below its 100 and 200 SMAs, while the technical indicators have turned lower within bearish territory after correcting extreme oversold readings. In the 4 hours chart, the technical indicators have recovered partially within oversold territory, but with the price around its lows and far below its moving averages, the risk remains towards the downside.

Support levels: 110.25 109.90 109.50

Resistance levels: 110.70 111.20 111.60

Bear in mind that when a currency pair reaches new lows, the only real support often is only provided by the central bank, in this case, the BOJ.

The downside risk

The Bank of Japan (BOJ) manipulates the yen; they want a cheap yen to boost export markets. The BOJ is not happy (and they like to be happy!) from FX Street:

“With USD/JPY edging closer to the 110, BOJ Governor Kuroda noted that the bank is monitoring developments in the FX markets. Chief Cabinet Secretary Suga said the government is also watching FX movements with “vigilance.” Yet the bar seems high for unilateral FX intervention, and even higher for a multilateral effort. USD/JPY hasn’t traded below 110 since the surprise BOJ easing back on October 31 2014. Charts point to a potential test of the mid-October 2014 low near 105.25.”

For investors who aren’t intimately familiar with how Forex works, the BOJ has the ability to essentially manipulate the price of the JPY. While the JPY trades freely in FX markets, the BOJ can create trillions of JPY and buy foreign currency, thus driving the price down. This is their most powerful weapon to destroy their own currency. Why would they want to do that? Because cheapyen means cheap Toyota (NYSE:TM), which means more sales. Japan is a net exporter, and their economy depends on a cheap yen.

So for this trade, it seems clear will continue in an upward trend, and USD/JPY will continue down; until a BOJ intervention or threat of an intervention. BOJ is so notorious for intervening, it may not even take a real market operation to drive down the yen, they may need only to make a statement. Apparently, 110.25 doesn’t justify an intervention just yet – and the question on everyone’s mind – how low is too low? 105? 95? 70? Somewhere in between?

The BOJ now has the mechanism for ‘soft intervention’ meaning they can just sell yen from their trade desk, as they did earlier this year.

Because of this great uncertainty, investors considering trading the Japaneseyen, (NYSEARCA:YCL), or USDJPY; should consider hedging their investment with protective option; such as selling a covered call against the position, or buying an opposing deep out of the money put. As explained in Splitting Pennies – Understanding Forex; there are many ways to trade Forex with reasonable, manageable risk controls. However, Forex trading is not for everyone, and investors should understand the risks before trading currencies. Most stock broker-dealers offer Forex pairs directly (you may need to open a separate “Forex” account), or you can open a Forex account with a reliable, regulated Introducing Broker.

Disclosure: There is a substantial high and unlimited level of risk of loss in trading commodity futures, options, options writing and off-exchange foreign currency products; such trading is not suitable for all investors.