The USD/JPY pair continues to see a lot of overhang at the moment, as the interest rate situation remains a bit cloudy. Traders are unwinding the “carry trade”, and as a result, the Japanese yen finds itself stronger again.
USD/JPY
The U.S. dollar continues to drop against the Japanese yen as the threat of tighter Bank of Japan policy continues to work against the carry trade overall. This is by far the biggest story in forex at the moment.
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Ultimately, this is a market that will continue to see a lot of volatility over the next several days, as we have PPI numbers coming out of the United States on Thursday, as well as CPI numbers on Friday. These could give us a bit of a change in attitude toward the Federal Reserve interest rate decision next Wednesday.
The Federal Reserve has been thought of as being a little bit more hawkish than anticipated
The Federal Reserve has been thought of as being a little bit more hawkish than anticipated, with the odds of a rate hike now at 60%. If the Federal Reserve does, in fact, raise rates and then, in the following session, the Bank of Japan does the same, then, as far as interest rate differentials are concerned, we have gone nowhere.
With that being the case, we are setting up for a potential turnaround, but right now it looks far too dangerous to play that trade. We are sitting on top of significant support between ¥153 and ¥152. Breaking below ¥152 would be another breach of support that would be very bearish.
Nonetheless, this is a market that seems more than willing to give the Japanese the benefit of the doubt at the moment, but a couple of announcements out of the United States could turn this thing around quite violently.
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