Potential signal:
- The USD/JPY pair is setting up for a certain amount of binary trading.
- If we get a daily close below the ¥139.75 level, then I am going to go short and try to reach toward the ¥136 level.
- I would have a stop loss at the ¥140.50 level.
- On the other hand, if we were to turn around and rally above the ¥144 level, then I think it’s a longer-term “buy-and-hold” signal, but you would need to have a fairly strong stop loss, perhaps the ¥141.50 level.
During the trading session on Friday, we've seen the US dollar drop pretty significantly against the Japanese yen, dropping below the 141 yen level. All things being equal, this is a market that continues to see a lot of volatility, but at this point in time, the market is also trying to test the 140 yen level underneath, and that is an area that I think is crucial for the US dollar. After all, this is an area that’s been important multiple times in the past, so we need to watch for whether or not there is going to be a certain amount of support in this market.
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If we can't hang on to that, then this pair probably falls apart. Quite frankly, we are oversold, but let's be honest here. The carry trade has been so busted up over the last several weeks that it's really difficult to get long of this pair anytime soon. Yes, the interest rate differential does favor the US dollar, and it probably will for quite some time.
Interest Rate Decisions
The Bank of Japan has an interest rate decision on Friday of next week, which is two days after what should be a 25 basis point interest rate cut coming out of the Federal Reserve. It'll be interesting to see what the Japanese have to say because they can only do so much as far as tightening is concerned as Japan is so heavily indebted. I do believe that in the long-term, we are going to see the US dollar go much, much higher against the Japanese yen, but right now we are still in a panic covering scenario with the carry trade. If we break down below the 140 yen level, then I probably see this market dropping another five handles. On the other hand, if we turn around and break above the 144 yen level then it's likely that we could go much higher, perhaps opening up the possibility of an even bigger volatile upward move. In general, this is a market that I'm watching very closely.
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