The USD/JPY pair has been on fire on Friday, as the markets price in the difference between the “tone” of these two central banks.
The U.S. dollar has skyrocketed against the Japanese yen as the Japanese raised rates overnight as anticipated, but stopped short of promising more rate hikes, at least not in an aggressive manner. We have pulled back from the 200-day EMA pretty significantly, so this is a situation where we'll have to wait and see.
I think the biggest takeaway here is that it's difficult to short the yen heading into the weekend
Because, let's be honest, anything can happen on the weekend in any given week, but that's especially true now that we have concerns about conflict in the Middle East and crude oil disappearing from certain parts of the planet for a while.
Ultimately, this is a pair that I still favor to the upside, but I recognize we have a lot of work to do. I'll be looking for short-term pullbacks to take advantage of adding to a position that I re-entered recently.
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The U.S. dollar continues to get a little bit of a boost due to the fact that Kevin Warsh was so hawkish, and the interest rate differential continues to favor America and probably will grow within the next few months.
The 50-day EMA and the 200-day EMA are right around that crucial ¥158 level, an area that had previously been support. So, market memory coming back into play on an exaggerated move like this is probably not a huge surprise because there's so much shorting that has been done recently.
I believe in the carry trade longer term, and I also do so with reasonable position sizing. No one specific day in a carry trade position should take you out. If you pay attention to that, generally speaking, you come out either very positively, like I did earlier this year, or you at least take less damage. And, at the end of the day, that's how you win.
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