The USD/JPY pair went straight through the roof on Monday, as the US dollar started beating up the Japanese yen. What is significant is the fact that we have broken a downtrend line, and as a result I believe that this market is going to continue higher. In fact, I have been suggesting that a move above the 99 handle is a decent buy signal. Now that the move has happened, I actually went long of this pair earlier in the day.
The US dollar also gained a bit against the Euro, and I believe that perhaps some of the larger traders have come back into the marketplace in order to "front run" the Federal Reserve and its decision on whether or not to taper off of quantitative easing. If they do, this will be very dollar positive going forward, and it will be especially interesting in this particular currency pair. This is because the Bank of Japan is working feverishly to devalue the yen, while the Federal Reserve would be taking steps that should be strengthening for the US dollar. In other words, this could be the epicenter of the Forex move based upon the Federal Reserve's decision.
Beware headlines
I look at this as more of a long-term trade than anything else. Certainly, the Federal Reserve is much closer to tightening than the Bank of Japan, regardless of whether or not they taper off of quantitative easing in the month of September or not. That being the case, this pair should ultimately rise over time, but you can expect a lot of volatility between now and whatever announcement the Federal Reserve makes. There will be a lot of people trying to guess what's going on, and of course the contrarians will be out in full force as well.
That being said, I ultimately think this pair goes to 110, and possibly higher over the next several months. I could be wrong, and the Federal Reserve could in fact surprise everybody by delaying quantitative easing, but even in that condition, I believe that the market will fall and offer a nice buying opportunity later.
