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The EUR/JPY pair had an absolutely horrible week, and even managed to break the bottom of the previous three hammers. If ever there is a signal that further weaknesses to come, we would have to think this is it. With this being said, a break of the low from this previous week is an acceptable sell signal if you were willing to put up with a little bit of volatility. Otherwise, a break of the low from six weeks ago would be sufficient as well.
It should be said that the low from six weeks ago is just above the 95 handle. We would feel a little bit more comfortable to short once that gives way, and we will also have to keep an eye on the Yen as measured against the US dollar. Unlike most currencies, the Yen is being worked against by its own central bank. The measuring stick is without a doubt the USD/JPY pair. If that market gets below the 78 handle, it's very likely that we will see the Bank of Japan get involved in one form or the other. This certainly could have an effect on this market as well.
With that caveat in mind, we do like selling this market as the Euro is simply far too toxic to own. There is the chance that the Japanese central bank will simply acknowledge the fact that the Euro is toxic and simply choose to ignore the exchange rate. As a matter fact, it's more than likely they will as it will certainly be a losing battle. However, with the Dollar being supported in other markets, the Japanese may feel that they have a better case for trying to prop up the USD/JPY pair. If they do intervene in that market, this market will surge as well in the aftershock.
As for buying, a break above the three hammers recently printed would be a massively bullish signal. However, we don't think that's going to happen anytime soon. In fact, we think this pair eventually heads to the 90 handle. We are selling rallies, and new lows.