The U.S. dollar versus the Japanese yen has enjoyed a year-long uptrend. However, breakouts have attracted sellers. Key trendline support has helped maintain the momentum. A policy divergence between the Fed and BoJ may now support the technicals.

When I wrote about the fresh milestone and breakout for the U.S. dollar against the Japanese yen (USD/JPY) (FXY), I did not point out an important technical feature of the daily chart. Immediate pullbacks tend to follow breakouts above previous highs for USD/JPY. The chart below places a yellow box around breakouts and the subsequent pullbacks.

(Click on image to enlarge)

The U.S. dollar versus the Japanese yen (USD/JPY) is in a year-long uptrend that features breakouts followed by slow pullbacks and grinding recoveries. Source: TradingView

The January 4th breakout created the multi-year high that attracted my attention. True to recent form, USD/JPY immediately retreated from that breakout. Now USD/JPY is back to pivoting around its 50-day moving average (DMA) (the red line above). If recent patterns hold, then this support should form the foundation for the next upward push in USD/JPY. Accordingly, I accumulated a larger long position.

The Bank of Japan (BoJ) may help fuel the long USD/JPY trade. The BoJ just finished its latest meeting on monetary policy. The central bank left interest rates unchanged and insisted that it has "...no intention of raising interest rates with inflation projected to stay below its 2% goal for years." This plan should maintain the kind of policy divergence that will continue to advantage the U.S. dollar over the Japanese yen. As long as the Federal Reserve maintains its hawkish, inflation-fighting stance, USD/JPY should continue trending higher.

The big wildcard is the countervailing force of risk aversion that can accompany a Fed tightening cycle. If that aversion unfolds into a full-blown correction in global stock markets, traders might flee to the yen as a "safe haven". Be careful out there!