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The USD/JPY fell during the session on Monday as the Japanese yen climbed against most currencies. The 78 handle in this pair continues offer support for this pair, and it should be known by now that the Bank of Japan is very interested in the 78 handle as well. Because of this, it seems very unlikely that any significant move below this level would go unnoticed by the central bank.
In fact, the longer we stay under the 78 handle on a break down, the more likely direct intervention is from the Bank of Japan. There will undoubtedly be more asset purchase programs announce them, as well as other forms of quantitative easing. Simply put, the Japanese are trying as hard as they can to devalue the Yen, as it is putting a serious hurting on their export sector. Unlike many other central banks around the world, the Bank of Japan is notoriously aggressive when it comes to keeping their currency weak. Is because of this that traders will have to take any threat of intervention or quantitative easing by the Bank of Japan seriously. Unlike the European Central Bank, the Japanese can and will act with impunity.
The action on Monday was fairly anemic, but it should be said that the rally in the stock markets were also on extremely light volume. This typifies a market that has very low volume in currency trading as well, and because of this it is hard to believe that we will break out of the recent consolidation to the downside when the entire market knows that the central bank is below and waiting.
It is because of this that we only look to buy this currency pair. If we do manage to break below the 78 handle, we will be very quick to go long on signs of support. In fact, we would be willing to take signs of support on the shorter time frames in that particular scenario. A break above the 78.60 level leads us to the 80 handle in our opinion, and we would have no qualms about going long at that point.
Even more interesting is that if we can get above the 80.60 level, we should see 84 taken as a target in short order. We are not selling this pair, as we do not fight central banks.