The USD/JPY pair rallied slightly during the session on Wednesday, as we stay above the 120 handle. With that being the case, it appears of the buyers are still in control, it makes complete sense as we have now spent 48 hours above the aforementioned 120 handle.
That was an area that was once thought of as massive resistance, and we have sliced through a couple of different times now. I feel that this market will continue going higher, and that every time it pulls back you should think of it as offering the US dollar “on sale.” After all, the Japanese yen is essentially the most hated currency in the Forex markets right now, while the US dollar of course is the most loved. With that being the case, this is a bit of a “perfect storm”, meaning that it makes sense of this pair goes much higher given enough time.
Divergent central banks
The Federal Reserve is stepping away from the quantitative easing game, and therefore the value of the US dollar should rise over the longer term. This is really a function of the bond markets, as they are not stepping into the bond markets and trying to stabilize the US treasuries anymore. With that being the case, there will be less demand meaning that interest rates will have to rise in order to attract buyers.
On the other hand, the Bank of Japan is doing the exact opposite, meaning that they are stepping into the bond markets in buying them. This drives down the value of the Japanese yen as it drives away money from Japan. In other words, people just simply don’t need to buy the Yen in order to get involved in bonds. Although the Forex markets are the largest in the world, the truth of the matter is that the bond markets really move most things.
With the diversions between the two central banks, I think that this pair continues to go much higher over the longer term. With that being the case, every time we pullback I look at it as a potential opportunity to add to an already fairly substantial long position that I currently own.
