The US dollar rallied quite significantly on Tuesday as we have broken out of a falling wedge. This is typically a very bullish sign, so one would assume that we could very well go looking to the ¥130 level. The ¥130 level is an area that we have threatened previously and even managed to break above. However, we pulled back as the market had been overdone, which makes quite a bit of sense as things got out of hand. However, it now looks as if we are ready to go much higher.
The 50-day EMA sits just below the recent pullback, so that may have had a slight influence, but ultimately, I think this is a market that continues the focus on the central-bank differentials, meaning that the fact that the Federal Reserve is much more hawkish than the Bank of Japan is the main thing to keep in mind. Because of this, you need to keep an eye on whether or not we can break to a fresh, new high, because it’s likely that we will see more money flow into this market at that point. On the other hand, you also need to keep an eye on the 50-day EMA, because if we were to break down below that level then we might threaten the ¥125 level, an area that previously had been very resistant to buying pressure.
The size of the candlestick for the trading session was rather impressive, suggesting that there is real interest in shorting the Japanese yen again. As the Bank of Japan has jumped into the markets and bought every bond they had to keep interest rates down, it appears that the inflation that Japan had been looking for over the last couple of decades has shown up, and it’s been quite a bit more punishing than they anticipated. Because of this, I think the Japanese year is in a bit of a death spiral, at least as long as the central bank chooses to interfere in the market. Japan is stuck between having a depreciating currency, or rising yields. They are going to have one or the other, and now it just comes down to what the DOJ chooses to do. As things stand right now, the yen continues to lose value.
