- The USD/JPY stabilized a bit against the Japanese yen during trading on Wednesday, after the shock announcement on Tuesday.
- Quite frankly, we are at an area that needs to hold in the form of ¥132, otherwise, we could see further damage to the previous uptrend.
- We are most certainly in a situation where things could change, and therefore it’s very crucial that you keep caution at this point.
This is further exacerbated by the fact that we are during the holiday season, meaning that liquidity is going to be a major issue. The size of the candlestick from the Tuesday session was brutal, so it would normally have me thinking there’s going to be some follow-through coming, but what I did notice is that the JGB 10-year went to 46 basis points. The Bank of Japan already stated that they were only allowing it to rise to the 50-basis point level. In other words, a lot of this may have already been priced into the bond market, which is what has been driving this pair for so long.
Be Cautious
In this environment, you need to be very cautious because the move may not necessarily be very orderly. With the lack of liquidity, we could see a huge move in one direction or the other, without even really understanding what happened. One thing is for sure, if we could somehow take out the top of that candlestick from Tuesday, it would catch a lot of people on the wrong side of this trade.
Alternatively, if we break down below the ¥132 level, that is very likely that we will test the 130 level as it is the next large, round, psychologically significant figure. I don’t necessarily know whether we are going to do that but there has obviously been a lot of momentum in that direction so it certainly would not surprise me. It’ll be interesting to see how this plays out because the Japanese yen has been one of the most oversold currencies all year. Now that we are heading to the end of the year, this could change, but then again this could be a story for January. We may simply hang around the 200-Day EMA and look for some type of footing.
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