By: Christopher Lewis
USD/JPY has been a pair that until recently would have put you to sleep trading. The pair has seen a fairly narrow range of trading as traders and the Bank of Japan were in a virtual standoff. The pair has long been sub-80, and the Bank of Japan has intervened several times in order to weaken the value of the Yen. It has seemed that every time the bears had finally taken complete control, the Japanese (and one instance several central banks) would send the pair back up via currency market intervention.
The strength of the Yen over the last several years has been playing absolute havoc with the Japanese economy, and the central bank has been fighting a losing battle the entire time. The Yen is a safe haven currency, and as a result of the financial crisis, the demand for Yen has been incredible. It wasn’t until several Bank of Japan interventions that the pair finally stabilized, with a real bottom in the 76.50 neighborhood.
The recent announcement that the central bank in Tokyo was getting ready to expand the bond purchase program that it has been involved with and the effect would be to weaken the Yen. Based upon the Federal Reserve’s quantitative easing models, this should have the desired effect in the end.
80 – It All Hinges On This Level
The pair had seen a massive support area at the 80 mark before falling even further. Since then it hasn’t seriously attempted to break back through, or even retest the area to confirm resistance. However, based upon the ferocity of the bulls at that area in the past, I believe this area is going to be highly resistive going forward. In fact, it is at this level that I think the future of the pair will be decided.
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The level will determine if the sudden surge is valid, and if the parabolic move is justified. At this point in time, I don’t believe it to be, but only time will tell. It is one thing to get a massive rally in a short covering frenzy like this, but to rise like that and continue higher – that is another question altogether. Because of this, I am going to wait until 80 is tested, and sell weakness as I see it. If we can close above 80, this could be a signal to go long on a buy and hold basis.