The USD/JPY pair initially fell during the course of the day on Monday, as fears of Asian problems persisted. After all, Chinese lost 7% during their stock market training day, and that of course would have had people looking to buy the Japanese yen, as it is considered to be a “safety currency.” While it isn’t necessarily easy to trade Chinese assets, quite often the Japanese markets and of course the Japanese yen are used as a bit of a proxy for that country.
We fell far enough to test the 118.50 level that was the bottom of the overall consolidation during the months of August and September. We found enough resistance at that area to turn things back around and form a hammer which of course is one of the most bullish candlesticks that you can see. With that in mind, we are buyers on a break above the top the hammer as we should head back towards the normalized area between here and the 123.50 level.
It doesn’t mean that it will be the easiest move higher, but quite frankly the overall pressure should win on the way to the upside as the knee-jerk reaction to Chinese selling pressure will certainly have abated over the next several sessions, and as a result it’s very likely that we will grinder way higher and that short-term traders will continue to buy dips time and time again.
On the other hand, if we break down below the 118.50 level it would indeed be very negative. That could get the sellers involved and very aggressive as we reach towards the 116 handle given enough time. The road would be rather rapid in our opinion though, because it would represent a bit of a capitulation. Ultimately, we believe that the buyers will win out though, so having said that we are much more interested in the breakout to the upside. Ultimately, we could reach as high as 125, as the Federal Reserve is more likely to raise interest rates quicker than of course the Bank of Japan will.