The USD/JPY pair could be one of the most interesting pairs this coming year. This is because of a variety of reasons, both technical and fundamental. The market is known for being very volatile, and this year will probably be even more so than usual.
The first thing that I would bring to your attention is just how important the 105 region is for this pair. The monthly chart shows this as plain as day, and because of this I feel the market is trying to make a serious long-term decision as I write this in mid-December of 2013. After all, the 105 handle looks like an “on/off” switch to me as far as direction of the market. If we can get above there – this pair goes much, much higher in my opinion. In fact, we could be looking at 120 given enough time.
A tale of two central banks…
The two central banks involved in this pair are going to determine what happens next. The Federal Reserve is currently monitoring the jobs situation in the United States, and this is the one area that concerns the board members at the moment. If the jobs numbers keep improving, this will lead to tapering off of the bond buying program, (read: quantitative easing) and this should be positive for the US dollar overall.
On the other side of the Pacific, the Bank of Japan continues to look dovish to say the least, and I believe that the markets will continue to discount easing by the BoJ overall. Therefore, this could be a “one way trade” just waiting to happen. The Japanese side of the equation is fairly well known, and as a result the real decisions are going to be made in Washington DC.
I see the bullish momentum building in this pair, and therefore think we will ultimately breakout to the upside. However, we could also see some kind of pullback to gain momentum. I think that a surge higher is more likely after this pullback, as the 105 level should be a stubborn one. Nonetheless, the markets will push this pair higher over the course of the year, and therefore I am only buying this pair in 2014, and look at pullbacks as buying opportunities. If we get tapering of any significance, I expect to see 120 by the end of the year. If it doesn’t arrive in any great strength, then 110 is probably more likely. Any pullback should be supported at the 97.50 level.
