• The US dollar has rallied slightly during the trading session on Wednesday, as we continue to try to find our footing against the Japanese yen.
• It does make a certain amount of sense, due to the fact that the interest rate situation continues to favor the United States, and of course, the Bank of Japan continues to try to keep the 10-year JGB yield down to 50 basis points.
• It’s worth noting that we pulled back from the 50-Day EMA, so some technical traders will take a little bit of solace in that.
   

Federal Reserve and Bank of Japan Divergence

The market breaking above the 50-Day EMA opens up the possibility of an attempt on the 200-Day EMA, which sits right around the ¥134 level. Anything above there then opens up a significant move higher, perhaps to the ¥137.50 level, and then finally towards the highs again. This would almost certainly be in an environment that sees higher rates overall, as the Japanese will have to do everything they can to defend their peg. This means they have to buy unlimited bonds, and therefore they have to print unlimited yen. That’s exactly what caused the major rally last year.

Underneath, we have had the market for a little bit of a double bottom near the ¥127.50 level, and I do think that when you look at the longer-term chart you can see that the ¥127 level is probably going to be important. Anything below that level probably sends quite a bit of FOMO to the downside, as there’s a huge air pocket underneath. That air pocket could cause a huge move and a massive unwinding of the US dollar. I anticipate that you would see the US dollar being pummeled against almost everything, and it would not be limited to the Japanese yen.

Expect noisy behavior over the next couple of days, which does make a certain amount of sense considering that the market is in the midst of trying to turn around a huge drop. These times tend to be very noisy under the best of circumstances, and of course, with all of the confusion that we have out there, it only makes things worse in this particular pair which is volatile under the best of circumstances anyway. A lot of patience will be needed.

(Click on image to enlarge)

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