The USD/JPY pair initially fell during the session on Wednesday, but as you can see bounced enough to form a bit of a hammer. This is the second day in a row that we see a bit of support here, and the fact that it comes after a major breakout of a significant downtrend line suggests to us that this pair is in fact going to be supportive going forward. This ties in nicely with the timing of the year, as large money comes in from holiday, and therefore we should have more volume coming soon.
On top of that, the Federal Reserve will be making a decision in two weeks as to whether or not to taper off of quantitative easing. Perhaps the market is already pricing that in, and that’s the case this pair should be extraordinarily bullish going forward. That would set up a pair in which we have two central banks diametrically opposing each other as far as strategy is concerned, as the Federal Reserve would be essentially tightening, while the Bank of Japan would be essentially loosening over the long-term as that economy still struggles.
The Bank of Japan likes a devalued Yen, and because of that we feel that this market will continue to go higher as the Bank of Japan works against its own currency. Going forward though, we think that eventually there will be pullbacks in time to time, but in the end this could be the beginning of a significantly long-term uptrend that traders can take advantage of for months, if not years to come. This pair has a long history of doing that, and as a result we think that traders will revert to the old “carry trade” if the Federal Reserve does in fact tighten up or at least taper off of quantitative easing. This would of course be a bit of a snowball effect, as more and more people start buying. In fact, we believe that the US dollar should continue to gain against most currencies, but this one would be particularly intense.
Written by FX Empire