The USD/JPY pair initially fell during the session on Thursday, but as you can see found enough support below the 102 level to turn around and form a nice-looking hammer. This is a market that we have favored for quite some time, although it has been rather negative sense New Year’s Day. That being said, we think that the longer-term outlook for the US dollars much stronger than the Japanese yen, and that the value of the yen is simply going to be unsustainable up at these levels.
When looking at the two central banks, this is the starkest difference between the two economies. You simply have one bank in Japan that is trying as much as they can to ease monetary policy, thereby in theory bring down the value of bonds. That in turn should bring down the value of the yen itself, which should pushes market higher. On the other side of the Pacific, you have the Federal Reserve. The Federal Reserve is currently on course to continue tightening, or as the media have dubbed did “tapering” off of quantitative easing. With that, we should see interest rates rise in relation to the bond markets for the United States, and that of course will continue to push his pair higher as a historically has done. Widening interest-rate differentials almost always pushes money in one direction or the other, and we don’t see that been any different here. As soon as the interest rates in the United States rise high enough to pay some type of swap in this pair, and will be almost a “slam-dunk” when it comes to buying.
With that being said, we are bullish of this market longer-term but recognize that this is an investment, not some type of short-term trade. There are going to be weeks where the market is and is kind as it could be, but we believe the longer-term that this market will head to the 110 level, and probably much higher than that given enough time. We are short the Japanese yen against many other currencies as well, at least where there are opportunities to make some money via the swap.