The USD/JPY pair had a bearish session on Monday, as the pair ran into the 79 – 80 resistance zone. The pair had risen quite a bit over the last week or so, and as a result it wasn’t a surprise to see a bit of a pullback at this point. The real question then becomes whether or not the pair will pick up the necessary momentum in order to break out.
The 10 year Treasury note in the United States is going to be crucial to understand the direction of this pair. The pair typically will rise and fall with the yield differential between the JGBs (Japanese Government Bonds) and the Treasury notes. As the yields rise in America, many will look to sell the Yen and buy the US dollar.
The recent action could be related to the fact that there is a growing consensus that the Federal Reserve may not be willing to ease its monetary policy in the near term, as Wall Street had hoped. If this is the case, the pair should continue to climb.
However, technically speaking there should be a pullback to the 78.50 level as more traders will be willing to get involved. This pair has been consolidating between 80 and 78, but the Bank of Japan is sitting below the 78 level and willing to intervene if this pair falls too far. In fact, the 76 level was vigorously defended by the central bank, and there is even some talk that the 78 was as well.
80, 80.60, 84
The 80 level is crucial to gain serious altitude in this pair. I am willing to buy this pullback on signs of support. I expect this pair to test the 80 level, and will be aiming for that. However, if we can get above that level – the 80.60 level will be calling as far as I can tell. If that level can give way for us – this pair could go all the way to the 84 level at that point.
As for selling, I simply will not do it as the central bank isn’t someone I am willing to compete with. The pair looks like it did in ’95, when it found a bottom. It is often a messy affair, and can be choppy before the trend change. Because of this, if you are going to buy this pair, you will need to be patient.