In the short term, more sideways nonsensical action is probably the case.
- The US dollar has been back and forth during the course of the trading session on Friday as we continue to see a lot of noise against the Japanese yen.
- Ultimately, this is a situation where market participants are going to have to figure out what to do with themselves, because the Bank of Japan is distorting the market.
- Quite frankly, central banks around the world have caused an absolute mess with financial markets, and this one is not any different.
The yen is a popular asset during turbulent times.
Central Banks Policies Are Leading the Way
That being said, as long as the Bank of Japan wants to keep the 10 year yields down to 50 basis points, they are distorting the market in the sense that yields cannot rise naturally. In order to do this, they need to buy unlimited Japanese bonds if we get anywhere near that 50 basis point level. This means that they are printing unlimited yen, meaning that the market is not showing a true response to actual market forces.
As interest rates fall around the world, this releases some of the concerns around Japan, and it opens up the possibility that the Japanese yen can strengthen. After we had seen the massive selloff of the yen last year, pushing the US dollar higher, the Bank of Japan finally had to acquiesce and let the 10 year yield go from 25 basis points to 50 basis points. Since then, we have seen this pair pullback. However, when you look at the longer-term charts, we are essentially at a region that should offer a bit of value and support. If we can break above the top of the candlestick from last Wednesday, I think this pair goes much higher, perhaps continuing the longer-term uptrend that we had been in.
However, if we were to break down below the ¥127 level, that opens up a significant selloff, one that could open up a huge “air pocket” underneath that allows the market to fall like substantially, maybe all the way back down to the ¥115 level. That would be an epic selloff in the greenback, so it obviously be felt in other markets as well. With this in mind, and the fact that we have an FOMC meeting next week, expect volatility to pick up after a few days. In the short term, more sideways nonsensical action is probably the case.
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