The US dollar dumped against the Japanese yen on Friday, as traders continue to pay close attention to the interest rate markets.
USD/JPY
The dollar yen initially did rally during the trading session on Friday, but since then we have seen several headlines coming out of the Middle East that have everybody excited for the prospects of peace. For example, the Iranians are now saying that as long as the ceasefire continues, the Strait of Hormuz is completely open. Since that kind of thing comes out, the bond market starts to collapse rates. With that being the case, we are well below 4.30%.
Having said that, you can also make an argument that the interest rate differential still favors the US dollar by a fairly wide margin. Therefore, you do continue to get paid to hold this position. I think what is going on here is that we are just simply trying to determine whether or not there is enough momentum to finally break above 160.40 yen.
Potential Breakout and Technical Levels
If we do, that violates a 1990 swing high and that is a potential multi-year move. I still think the risk is to the upside, although clearly, we have cooled off over the last couple of days. Eventually we went back to the carry trade.
Perhaps what sends this higher would be maybe some type of conversation coming out of the Bank of Japan because they have such a crushing debt in Japan that higher interest rates are really bad for that economy. There is a little bit of inflation in Japan for the first time in ages, but we are a long, long, long way from a big monetary tightening policy cycle. Energy inflation has been an issue, but that could go away if the Strait of Hormuz remains open.
With all of that being said, I am looking for a buying opportunity. I don’t know that it is right here, but this is a good area to start thinking about as the 158-yen level has been supported. If you are a shorter-term trader, maybe you are more inclined to buy the right-hand side of the V on a 30-minute chart. If you are not, then you need to see a bounce. Otherwise, you may see this market reset at 156-yen underneath, which is an even better value from what I can see. I have no interest in shorting this pair.