The EUR/JPY pair is quietly trying to find a bottom. With the Bank of Japan on Friday, this could be an interesting setup.
EUR/JPY
The euro has bounced a bit against the Japanese yen, as we have seen broad yen weakness over the last day or two. This pair has found the ¥178 level as a potential floor in the market, and that might be something worth watching because, quite frankly, this market has been sold off just as aggressively as all the other yen-denominated pairs.
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With traders now thinking that the Japanese are going to tighten aggressively, and with intervention floating around the markets as well, it is not a huge surprise to see that we fell here. The Stochastic Oscillator says we are in oversold conditions. We are starting to turn in the other direction, but the real determinant here will be the Bank of Japan decision on Friday.
They are expected to raise rates by 25 basis points.
That in and of itself will not be the surprise. The surprise will probably come in the form of the press conference or even the statement. If they sound overly hawkish, that could be ugly for this pair and anything else denominated in yen.
But having said that, it is worth noting that the Japanese debt load is massive. It is the largest one in the developed world, and therefore higher interest rates really come at a price for the Japanese. This is a situation where they have to show markets that they are willing to defend their currency, but at the same time, they are going to have to deal with higher rates on that massive debt load. It makes the Americans look quite frugal, to be honest with you.
So, I am watching this one. I am looking for a little bit of a rise. We have seen the U.S. dollar pop up against the Japanese yen and break a little bit of structure over the last couple of days. So, we will see if this one can follow.
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