If you have watched USD/JPY at all, it has usually been making these weird spikes upwards sometimes for 50 pips, other times for 100 pips that usually get corrected within minutes. Since the August 4th, 2011 intervention by the Bank of Japan, I count the market as making six of these spikes up. All of which were quickly reversed. One of them was due to the NFP report, but all the others were due to other reasons.
Here is a chart
Are they random? Why do they occur? Are they noise in the market?
There are answers!
If you have a technical indicator mindset then such a trader can assume that the reason usd/jpy spiked was due to the fact that the market wanted to retrace higher to hit a few key moving averages. Then once price tested the magical moving averages the market found resistance there and decided to go down again.
If you have a price action mindset then you can assume that the market wanted to pullback to a nice fib retracement level or to a nice support and resistance point. Then the market formed some sort of pinnochio bar and decided to get over extended and dropped lower again.
The person trading with astrology can believe that the reason usd/jpy spiked up and then dropped lower was due to some relationship between the planets and the lunar cycles, etc.
Bottom line is that everyone has a different reason why they believe the market did what it did. They have different ways of rationalizing what they see on the charts.
Order Flow and Liquidity Reasons
There are almost always very good order flow and liquidity reasons for the market to make its movements.
Luckily the WSJ has kindly written an article as to the “why” behind the price movement.
I will now proceed to analyze the article for you.
Traders also say secret yen-selling defeats the purpose of intervention and is a waste of money.
The above quote is true. When the Bank of Japan intervenes they want everyone to know they are doing so. The reason they want the world to know is so that the traders that are heavily short USD/JPY can get spooked and proceed to cover their shorts. If those intraday speculators, swing traders and macro traders who are short believe that the BoJ is not intervening then there exists more potential for them to be willing to hold through the spikes up. On the other hand if they knew the BoJ was coming into the market with tens of billions guns blazing, they would be much more willing to cover their shorts, or at least part of them.
The article states that there are big commercial banks that are buying a lot of USD/JPY and then attempting to spook the market and convince it that it is buying on behalf of the Japanese authorities.
And the bank can enhance the effects of such a surprise attack by spreading the rumor that they’ve been rate-checked by the Bank of Japan, which acts as the MOF’s agent in currency intervention.
You buy a good sum, and tell your friends the BOJ just asked your banks for price quotes and may be about to make a deal,” the senior dealer said. “And there’s no way for dealers outside of your bank to confirm whether the bank was really checked.
So some commercial banks can come in and buy a few hundred million USD/JPY, then spread rumours that they have been rate checked and that could be enough to spook out some weak intraday short players. If a small liquidity vacuum appears then the price can spike higher as some trailing stop losses are hit in the market. The price spikes 50 to 100 pips and the commercial bank has some sell limit orders waiting to get out of its position.
It doesn’t want to hold the positions for too long because it knows the global macro environment is to the downside. Also, once the market figures out that the BoJ did not intervene and that the rate check rumour was false the macro sellers will come back in and push USD/JPY lower.
The commercial banks have pocketed anywhere from 30-100 pip profit within a few minutes. Some intraday short players were squeezed and eventually the price starts drifting downward again.
Those are the closest possible order flow and liquidity reasons for the market to be making those kind of movements. Those reasons above are far closer to the truth than all those technical indicator, chart pattern, forex robot, etc.