- The USD/JPY continues to grind around the ¥132.50 level, an area that has been important multiple times in the past.
- Keep in mind that the Bank of Japan has recently allowed for the 10-year Japanese Government Bonta to yield as much as 50 basis points, and therefore it strengthened the Japanese yen.
- However, the bond market almost immediately shot towards the 48-basis points level, so the question now is how much farther can it go? I think this is going to be a test of the Bank of Japan and whether they are serious. If they do hold out, that means that the Japanese yen may not have much further to strengthen.
The interest rate differential is wide enough to drive a truck through, even though Tokyo has given up a little bit of room. Ultimately, this is a scenario where you will have a lot of questions asked of the bond market, and there will almost certainly be people willing to test it. However, I think we are more likely than not to see a little bit of short-term recovery in the meantime, especially as liquidity will be an issue.
A Lot of Liquidity Will Be Gone
Keep in mind that being between two major holidays means that a lot of the liquidity will be gone. Most big traders will be bothered dealing with the markets because they will be dealing with family and vacation. That makes for a potentially dangerous market; therefore, you need to take caution via your position sizing.
Given enough time, I think the ¥130 level will act as a potential support floor, but if it fails, that means that we will have a flush lower. I think that we will have all these answers sometimes by the middle of January, so in the meantime it might be a matter of trading back and forth on short-term charts, trying to determine where to go next. I do believe ultimately this is a market that could be a huge mover next year because a lot of the issues that were present last year are still out there, and of course, we must worry about the risk on/risk off type of scenario going forward. Given enough time, it’s very likely that we’ve got a situation where you are better off trading short-term charts, but if we were to break above the ¥137.50 level, there may be even more of a correction head.
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