Potential signal:
- I am buying – again – above the 160 yen level to add to my already long position.
- I would have a stop for this part at 159, and look for 163 above.
- The interest rate differential continues to be in focus in this pair, as we wait for the speech at Jackson Hole from Chairman Kevin Warsh.
USD/JPY
The US dollar has gone back and forth against the Japanese yen during trading on Thursday, which does make a certain amount of sense considering that Friday features a speech by Kevin Warsh, the Chairman of the Federal Reserve, coming out of Jackson Hole. That could have people trying to determine whether or not the Fed is going to raise rates later this year.
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The interest rate differential between these 2 currencies continues to be a major driver of where we are, and I do like buying the dollar against the yen. The question, of course, is going to be whether or not we remain hawkish in the United States or if that starts to disappear. Most traders are betting that we are not raising by the end of the year, but then the question becomes: is the interest rate differential going to shrink enough to get the carry trade out of vogue? And my answer, at least right now, is no.
Carry Trade Viability and Intervention Dynamics
The 160 yen level is an area that's a bit of a barrier, and if we clear that, then I think that would be a very straightforward repudiation of the idea of killing off the carry trade, at least in the short term. Yes, the Bank of Japan has intervened 3 times now, but generally speaking, all that does is slow down a move; it very rarely reverses a trend. And that is basically a function of not wanting the currency to depreciate too quickly. It's not even that it's depreciating; it's that it did it way too rapidly.
Since we've had that intervention, the market has been pressing against the Bank of Japan and the US Treasury Department. This is a trade that I'm still in, at least for now. I've been collecting swap for months. That sell-off a couple of weeks ago was pretty brutal, but at the end of the day, if you are positioned correctly and with the correct size, you can take advantage of this. If we break above 160 yen, I'll probably add.
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