The USD/JPY pair fell during the session on Wednesday to retest the 78.75 support level that it visited the previous two sessions. The market looks relatively weak, but the fact is the Bank of Japan is underneath the current levels and willing to prop this pair up. The strong Yen has been wreaking havoc on exports out of the Japanese mainland, and as such the central bank will be extremely pressed to work against the value of it.
The area below will certainly get the Bank of Japan concerned about the value of the Yen, and we believe that sooner or later they will get involved. The 78 handle is the most obvious place that we can see on the charts that looks like a natural support level, and an area that the Bank of Japan will more than likely stepped in at. The central bank will more than likely intervened via asset purchases first, and then perhaps direct intervention. Because of this, we will not buy the Yen at this point in time.
We are still looking for a reason to buy this pair, and a supportive candle between here and the 78 handle would in fact be a good enough reason. The Federal Reserve has an explicitly stated that further easing is coming, while the Bank of Japan most certainly has further easing coming. With this scenario, we think that eventually we will see this pair reverse, but it should be noted that the last time we hit a “bottom” in this currency pair, it took several months for the reversal to actually take hold. This was in 1995, and after several intervention attempts by the Bank of Japan.
Between here and 78, we think that any hammer should be bought on the daily charts. This would be the optimal candle to buy, but we may not get that so we will simply use strong looking action, knowing that the Bank of Japan will more than likely have our backs. We would suggest starting out with a small position, knowing that if we can eventually get above the 80.60 level, this could become a longer-term buy-and-hold type of trade. It is above that point that we would consider adding to any longs that we have on at that time.
Written by FX Empire