- The USD/JPY rallied during the trading session on Tuesday as we initially pulled back, only to see the CPI number come out much hotter than anticipated.
- This has the Fed Funds Rate futures rallying, as traders are trying to figure out just how tight the Federal Reserve is going to get.
- At this point, there’s not much to keep it from tightening aggressively, and therefore does make quite a bit of sense of the US dollar continues to take off overall.
Looking at this chart, the ¥145 level is an area that has been obvious resistance, and of course, it is a large, round, psychologically significant figure. The ¥145 level has also been important in the past, so does make a certain amount of sense that we will be paying close attention to the action in that area. The size of the candlestick is reasonably strong, but it is worth noting that we did stop right at the ¥145 level. Perhaps we will see a little bit of a pullback, but this is a market that has been strong for a while, so it makes a certain amount of sense that we have a little bit of reluctance to get overly aggressive at this point.
Interest Rate Differentials Favors the Dollar
Underneath, the ¥140 level is an area that I think will continue to offer support, as well as the 50-Day EMA. Ultimately, this is a market that I think will find plenty of buyers underneath, as the Bank of Japan continues to see the need to fight interest rates rising. In other words, they are buying unlimited bonds, doing what is known as “quantitative easing.” The market is likely to see the interest rate differential between the US dollar and the Japanese yen expand, so it makes quite a bit of sense that we will go higher. At this point, the market is unlikely to see any serious selloff until we break down below the ¥135 level. If we do that, then we start to ask serious questions, but I just don’t see that happening anytime soon. In fact, I am more than willing to buy the next dip as there are plenty of value hunters out there just waiting to get involved in this market as it is essentially a “one-way trade.”