The USD/JPY pair broke hard to the downside on Thursday as the market entered into the “safe haven” mode yet again. The issues in Europe have the markets nervous at best, and rumors during the session that the Bank of Japan was likely to enter a program like the Federal Reserve’s “Operation Twist” has the market buying Yen as this is seen as less effective in devaluing the currency.
However, when looking at the yield curve in Japanese Government Bonds, it is very apparent that the results of a Twist-like move would be minimal at best, as the yields are so low already. It is because of this that we think this could set up to eventually be a buying opportunity. Also, there is the part about the Bank of Japan intervening a couple of times in the area just below, so we certainly don’t want to sell at this point.
The 200 day exponential moving average has been broken to the downside at this point, and this will certainly have some traders selling going forward. However, the 61.8% Fibonacci level has held as support at this point. (This is in fact, the only technical bullish sign we can see at the moment.) The pair is closing near the lows for the session, and as a result there is probably further to go on the downside. However, as stated above – we are not comfortable selling this pair as there is certainly going to be a high potential for the Japanese to get involved.
The possibility of further easing in the United States seems to be on the table going forward as well, as shown in the gold markets during the session. This is built on the idea that the problems in Europe will be so damaging to the economy that the Fed will feel they need to step in. The minutes released a few sessions ago does suggest that there are plenty of members on the board that are willing to enter more quantitative easing if the situation dictates it. However, there is nothing out there yet that suggests this is imminent. Because of this, we will sit on our hands and wait until we get a supportive candle to start looking at going long this pair.
Written by FX Empire