Over the last few sessions, we have seen the U.S> dollar clear significant resistance against the Japanese yen. However, there are officials now threatening the markets with potential intervention from Tokyo.
USD/JPY
The U.S. dollar initially pulled back against the Japanese yen during early trading on Thursday as a Japanese finance minister essentially threatened the market, saying that the sharp FX moves are not acceptable.
Regardless, even if the Bank of Japan does intervene, we've seen how that plays out over time. The reality is that real yields in the Americas continue to make U.S. debt attractive. At the same time, the interest rate differential between the United States and Japan makes this more or less a one-way trade.
Next barrier
Now the next serious test will be the 160.50 yen level where they had intervened at the beginning of September on the 2nd. This is an area that I think a lot of people will be watching closely, and headlines, as well as fireworks, would likely be the result.
I am already long this pair and have added as we broke above the crucial ¥159 level. If we can break above the ¥160.50 area, it could open up fresh real estate for buyers to start to get involved. This is an area that would, in theory, potentially be an “air pocket” based on the previous move.
Does that mean that the Bank of Japan intervenes? It's possible, but this has been a cat-and-mouse game for some time, and I do like buying dips. I like holding on to it and collecting the interest rate differential because, quite frankly, sooner or later, the reality will be played out on the charts that Japan has major issues.
They cannot handle higher rates, and as long as the economy can't handle higher rates, it does weaken the currency over the longer term. This is a pair that I am long of, and I am adding to.
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