The US dollar dropped to kick off the week, but has since bounced back a bit to show signs of resilience.
USD/JPY
The US dollar initially pulled back just a touch against the Japanese yen but has found buying pressure near the psychologically important 155-yen level. Now keep in mind that we are reacting to the candlestick from Thursday when the Bank of Japan did not intervene, according to them, and despite the fact that they made some threats, they still say that they did not. Regardless, the market knows what happened and now is ready to test the Japanese central bank.
Debt Dynamics and Yield Differentials
Interest rate differential is still at about 2%, so you get paid to hold this pair and you also have a problem where the Japanese simply do not have the ability to keep rates super tight for super long. They quite frankly are the most indebted industrialized nation in the world by a large amount and therefore they cannot sustain large interest payments.
So with that being said and the fact that the nonsense in the Middle East continues, there has been some missiles fired today, it makes sense that yields in America continue to climb. In fact, we're at 4.43% and climbing in the 10-year and that means bad things probably happen. The Bank of Japan like I said is somewhat limited in what it can do. It can either drive the value of the currency up via higher interest rates and not be able to make those interest rate payments or try to make those interest payments, but you can only do that with a weaker yen.
To quote some of the better analysts I know, Japan is a bug looking for a windshield. In this environment I am a buyer. I do believe that breaking above the high from Friday is a signal. I also recognize it's a grind higher; it's not something that's going to be like a rocket taking off and if we break down from here and get stopped out, I'm okay with that too. I'll just buy the dollar at a cheaper level. This is a one-way trade and if we can break above the highs of the Thursday candlestick, that means something because that's a 1990 high. If we break that we could be looking at 245 and on Thursday we saw the Bank of Japan show just how dangerous it is to test that because if the yen melts down, there's a lot of debt around the world denominated in that currency and things get interesting.
Potential signal: I am scaling into a position at 157.40, with a stop loss of 156.00 and targeting 160.