The US dollar fell a bit during the day on Thursday as we continue to see a lot of noisy behavior between the ¥127.50 level and the ¥130 level. The market has seen a lot of intervention from the Bank of Japan, so it is not necessarily an open and free market right now, as the Bank of Japan continues to try to keep yields as low as 50 basis points on the 10 year notes.
That being said, I think we are in a situation where we have a lot of noisy behavior ahead, and of course you have to pay close attention to the massive inverted hammer that formed during the Wednesday session. The inverted hammer was the result of the Bank of Japan’s repeated desire to keep interest rates low in Japan. Thus preparing to buy “unlimited yen”, in order to buy “unlimited bonds”. On the other hand, the market continues to see a lot of negative pressure on the US dollar, so we are seeing a lot of back and forth in the short term.
Ultimately, I think we are at a major inflection point. A breakdown below the ¥127 level could send this market much lower, as I think there is a significant air pocket below there. On the other hand, if we were to turn around and break above the top of the inverted hammer from the Wednesday session, it is very likely that we will continue to see a lot of bullish pressure because it would be a massive turn of events. The market is also starting to pay attention to the so-called “death cross”, which is when the 50 day EMA breaks down below the 200 day EMA. Although it is usually a lagging signal, it is one that some longer-term traders pay particular attention to. All things being equal, I think we are likely to have a lot of noisy back and forth behavior over the next several sessions as we struggle to get a bit of clarity. Ultimately, it is only a matter of time before we have to take a bigger position and make a move in this pair. It was a rather aggressive sell-off, but the road to it has been quite aggressive as well, so it makes quite a bit of sense.
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