USD/JPY Daily Outlook March 20, 2012

By: Christopher Lewis

At the moment, the USD/JPY pair happens to be one of my favorite ones to be involved with. To me, this pair has several reasons for me to be long of it on both sides of the equation, and while that is the general idea of successful trading, the truth is that we rarely have so many reasons for a trade to move in a particular direction as we have at the moment in this market.

The Yen side of the equation has several reasons to sell it. The Yen has been weakened by the Bank of Japan itself as the central bankers have been buying government bonds hand over fist recently, and it looks like this program will continue for some time going forward. The Japanese economy is heavily dependent on borrowing, as the debt to GDP ratio is at over 200% currently. For years, this hasn’t been an issue as long as the Japanese public was willing to keep funding the bond markets. However, there is a major problem: The Japanese population is aging rapidly. This will without a doubt make central bankers in Japan continue to buy these bonds for years to come, and probably far longer than anyone is aware of. All of this “buying” is the same as “printing” Yen.

On the other side of the trade, you have the US dollar. The US economy has been showing signs of life lately, and this can also be seen in the rising interest rates in America. Also, the Dollar enjoys a bit of a safe haven status. While the Yen does as well, this means the USD/JPY pair will fall much less than AUD/JPY, NZD/JPY, and many other “carry trades” involving the Yen. While the swap is larger with the other pairs, the safety of the Dollar will keep the down days much smaller over the long run.

Hammer at 83.

The pair formed a hammer at the 83 level on Monday, showing that while the pair sold off there were plenty of buyers stepping up to stabilize this pair. I am currently long, and would take a break of the top of the Monday hammer as a signal to add to my position again. It will be a small addition, in fact only 10% of the original size, but it will be an addition none the less. If I weren’t already involved in this pair, I would be initiating a new position on a move above the highs on Monday as well. I expect we will see 85 fairly soon, as it is the next resistance level.