The US dollar initially tried to rally on Wednesday but gave back a little bit of the gains to hang about the ¥115 level. At this point, the market is likely to continue seeing a lot of noisy behavior, but at the end of the day, Forex tends to favor carry trading at the moment. In other words, when there are higher interest rates in one country over another, that is where money flows. We have seen this in this pair quite drastically over the last several months.
The Federal Reserve is looking to tighten monetary policy and we have seen rates in the United States rise quite rapidly. On the other side of the Pacific Ocean, we have the bank of Japan, which is light years away from doing anything close to tighten monetary policy. This is a market that should continue to go higher based upon that reasoning alone. However, there are a few possible issues out there that could have this market turning around. The first one is the fact that there are a lot of geopolitical issues, and a lot of times money will flow back into Japan in that scenario. This is especially true with the Russians invading Ukraine.
Another potential issue with this pair is that if the Federal Reserve finally buckles into the pressure and suggests that they are not going to be hiking anytime soon, then it is possible that we will get a massive reversal. From a technical perspective, it is important to recognize that the ¥116.33 level above formed a bit of a double top, and it is also an area where we had seen a lot of resistance previously. It is because of this that I think the market will continue to grind higher, with the key word being “grind.” The 50 day EMA sits underneath and is rising. This has been dynamic support for several months, and so far, it looks like we could very well do that. That being said, expect a lot of choppy behavior. I would not put a ton of money into this market right away, but only add when the trade starts to work out for you. Shorting is all but impossible at the moment.
