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The US dollar has rallied significantly during the course of the month to break significant levels to the upside, and it now looks very much like a market that has decided it wants to be bullish. Short-term pullbacks will more likely than not end up being buying opportunities, and that should allow you to see plenty of buy-on-the-dip opportunities with the interest rate differential playing out through the bullish behavior.
The US dollar has strengthened for a multitude of reasons, but not the least of which would be the fact that the interest rate differential between these two currencies is so wide. As long as that's going to be the case, traders continue to favor the US dollar, and I do think it would take a lot to get things going in the other direction, because we've already seen a couple of interventions by the Bank of Japan, and while those did cause some efficacy for the short term, the longer term has certainly seen buyers come in and overwhelm that.
Interest Rate Differential Drives USD/JPY Carry Trade
I think at this point in time, the biggest thing you need to pay attention to is whether or not the move starts to get out of hand. It's slow and gradual, and that's exactly what you want to see. If the Federal Reserve does start to tighten or at least look like they're going to tighten sometime later this year, that could add more fuel to the fire. This will be a big story if the situation in either D.C. or Tokyo changes.
If you're patient enough, you get paid at the end of every day to hold this pair to the upside, and I think we are more likely than not going to continue to see that dynamic play out. I have no interest in shorting this pair, and quite frankly, don't see a scenario where things change unless things get out of hand from a geopolitical standpoint. The noise will continue to be a massive factor here, just as it will be in many other markets.
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