The US dollar rallied a bit on Friday to show signs of strength yet again. However, we gave back a bit of the gains to form a shooting star. The market is at the top of what could be thought of as a bullish flag, so we need to pay close attention. With that being said, I think short-term pullbacks are likely, but they also are likely to attract a lot of attention.
If the market does fall from here, I suspect there is a significant amount of support near the ¥127.50 level, and then again at the €125 level. Ultimately, I think that any pullback will offer value that people are willing to take advantage of as potential “cheap dollars.” The trend has been brutal, so it does make quite a bit of sense that we would see plenty of traders willing to get involved, and to think that we are suddenly going to change is a bit of a stretch.
The Bank of Japan continues to try and force the interest rates below the 0.25% level and is essentially “printing yen.” On the other side of the Pacific Ocean, we have the Federal Reserve looking to tighten monetary policy, so I think that the greenback will continue to strengthen. I have no interest in shorting this market anytime soon, so I look at these potential pullbacks as opportunities. At this point, you need to take a little bit of time to see value appear because it is obvious that we have broken to the upside.
The ¥125 level is an area that I think could be tested on any type of US dollar weakness, but that weakness will be short-lived as we have seen the US dollar strengthen against almost everything. The long-term correlation with the Japanese yen as a safetycurrency has been busted by the Japanese central bank, so now the question is will they have to turn things back around? They have started to complain about how quickly the yen is depreciating, but so far do not seem to be willing to step into the market. They have a choice of either a strengthening currency or low rates. They cannot have both.
