Continues to Push Against Yen

Although the British pound spiked well above the ¥165 level recently, it sold off quite drastically in the same session. However, it’s important to note that the British pound isn’t the driving force in this market.

• The GBP/JPY experienced an initial drop against the Japanese yen during Thursday’s trading session, as the market continues to display volatile behavior.
• Although the British pound spiked well above the ¥165 level recently, it sold off quite drastically in the same session. However, it’s important to note that the British pound isn’t the driving force in this market.
• The Japanese yen, with the Bank of Japan’s yield curve control policy, is more likely to determine where everything is heading.
• The Japanese are printing yen to buy bonds in an attempt to keep the 10-year yield at 50 basis points or lower. So far, they’ve been able to do this, but it will, at the expense of the exchange rate of their currency.

As one of the few central banks with a loose monetary policy, the Bank of Japan is under pressure from traders, who are likely to continue to put the Japanese yen under pressure. The shooting star that formed on Tuesday should be regarded as major resistance, but it appears that this pair will do everything possible to test that area. The reason we sold off from where we did is that we touched the top of the massive wipeout candlestick from last year. That candlestick was when the Bank of Japan announced that they were allowing the 10-year yield to rise to the 50-basis points level from the previous 25.

If the market pulls back from here, the 200-Day EMA, which currently sits near the ¥162 EMA, should provide significant support. Anything below that level would be interesting, but it doesn’t seem like the Japanese yen will strengthen suddenly, and it would almost certainly need to see yields drop worldwide for that to happen. As yields continue to rise in other markets, it puts more bearish pressure on Japanese bonds, driving yields higher, which requires the central bank to intervene and start buying again. It’s a vicious feedback loop that the Japanese currently find themselves in.

As a result, I remain bullish on the market but do recognize that the occasional pullback will occur, but those need to be looked at through the prism of a potential value play, so keep in mind that those dips are likely to attract a lot of inflows. At this point, it’s clear that the market is much more comfortable going higher than lower.