The US dollar continues to see momentum to the upside against the yen on Friday.
USD/JPY
The US dollar continues to see buying pressure against the Japanese yen as we head into a weekend that could be monumental as far as risk appetite is concerned. The Americans and the Iranians meeting in Pakistan will have a major influence as to where the overall risk appetite of traders will be and I do think you have a scenario where a lot of traders will just simply look at this as a buy on the dip market because of the perceived safety of the US dollar.
With this being the case, I think you have to look at this as a market that is almost solely moving on interest rates, but at the same time you can also make an argument that the trading public out there is likely to continue to see quite a bit of questions asked of how much further this can go on.
A Historic Resistance Barrier
After all, we are getting pretty close to a major resistance barrier in the form of 160 yen. Market participants will continue to look at this area as important as we have seen a major swing high put in right around 160.40 yen back in 1990. In other words, this is essentially a 36-year high that traders will be watching.
If we were to end up breaking above that 160.4-yen level, I think that could cause absolute chaos in the markets as traders will be looking very closely at the idea of the Japanese yen perhaps being weak structurally. This could be a situation where it ends up being weak for months, possibly even years in this environment.
The interest rate differential continues to favor the US dollar so that certainly makes a bit of sense and I do think you have to accept the fact that if you were to short this pair you are going to be paying swap at the end of every day and that is one of the things that really has been hurting this pair. The Bank of Japan is just not in an environment where it is going to be looking to tighten monetary policy significantly anytime soon. Sure, inflation is sticky in Japan, but it is sticky everywhere and you must keep in mind that trading currencies is relative.