The Federal Reserve is very tight with its monetary policy and is running its balance sheet down on top of everything else.
- The USD/JPY has rallied a bit during the trading session on Wednesday as we continue to threaten the crucial ¥145 level.
- This is an area that’s been very difficult to break above, and it’s also worth noting that it is just below where the Bank of Japan got involved and started supporting its currency.
- After all, the Japanese yen has been crushed, and a lot of this comes down to the fact that the Bank of Japan continues to buy unlimited bonds. This is the same thing as printing currency, so it’s essentially quantitative easing.
On the other side of the Pacific Ocean, we have the Federal Reserve. The Federal Reserve is very tight with its monetary policy and is running its balance sheet down on top of everything else. In other words, money in America is getting tighter, so therefore it should continue to drive the value of the US dollar higher, thereby making this a bit of a perfect setup as it is a complete divergence of the 2 central banks.
Looking to Buy the Dip
Granted, the Bank of Japan did come in and start buying again to push the value back down in despair, but it’s also worth noting that they use 15% of their reserves, which is a huge move. They can’t do that too many times, so I think what’s going to happen is that we will eventually break out to the upside, if central bank policy remains the same. If that is going to be the case, then this market will eventually break out. However, the breakout is not something that I fear, just it’s going to have to be gradual, and not sudden. If the appreciation of the dollar against the Japanese yen is orderly, more likely than not the BoJ won’t get involved. On the other hand, if we do breakout to the upside and really start to scream higher, then it’s possible that the BoJ starts intervening in the Forex markets again.
My favorite way to play this market is to buy dips, and approach from short-term timeframe. The ¥142.50 level should be supported, just as the ¥140 level should be, especially now that the 50-Day EMA is sitting right around the same area. Ultimately, this is a market that will remain volatile, but I still favor the upside.