The USD/JPY pair continues to see a lot of stability on Tuesday, as we are looking to see if the selling is over.
USD/JPY
The US dollar has stabilized against the Japanese yen right around the 200-day EMA after forming a nice hammer during the Monday session. The 158-yen level seems to be a short-term barrier at the moment, or maybe you could just say the 200-day EMA. It's basically the same thing.
Keep in mind that the interest rate differential still favors the U.S. by a wide margin. It's well over 3%; it's a little closer to 3.5. So therefore, you get paid to hold this position. Now, I've been long in this market for months and have remained so despite the intervention because of the longer-term outlook for Japan.
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While there are concerns about the carry trade potentially causing chaos in the financial system, the reality is the markets will do what the markets will do. And we've already seen them push back a little bit from this. You cleared out a lot of the hot latest money to come into the market. That's generally what these things do. And then the overall trend will eventually follow where we were going in the first place.
Technical Analysis
From a technical analysis standpoint, that was about 224. That's still true, despite the fact that we've had three really bad days. The real question is going to be over the next several sessions, maybe even the next couple of weeks, do we get more sideways or upward pressure? If we do, then I think that sets us up for another showdown down the road. This is all about position sizing.
Now, if we were to break down below maybe 154, then the trend's broken completely. Then you start to have a completely different conversation. I'm not going to short this pair even if that's the case, because quite frankly, why do I want to pay swap at the end of every day for a swing position? If I was going to buy the yen, I would find something that yields less. Without looking at it right now, maybe the Swiss franc against the Japanese yen might be a good pair.
Ultimately, though, inflationary numbers in the United States started to come down, but yesterday's manufacturing PMI numbers were the hottest they've been in 12 years. And I can assure you as somebody that lives in the United States, people have not stopped shopping. The malls and the stores are just packed. And that doesn't even include Amazon. So, we've seen a couple of these weird bumps in the road with US data since COVID. I think we're in the middle of that again.
Ultimately, this is going to come down to the interest rate differential. Still, the rates are dropping over the last couple of days. Makes sense. People believe that the situation in the Middle East is closer to being solved somehow. And as long as that's the case, then rates may drift a little bit. But I'm watching this very closely over the last couple of days. I've been on for about a year and three or four months, maybe.
I still think ultimately the Japanese yen is going to be just absolutely obliterated. The law of large numbers is still working against it. Quite frankly, they had to have the Americans come and bail them out.
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