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The USD/JPY pair had originally tried to rally during the previous week, but with the poor jobs number out of the United States on Friday this pair fell precipitously. The resulting candle was a shooting star sitting just above the all-important 78 handle, and as such it looks like there will be an attempt by the market to test the patient's of the Bank of Japan.
This currency pair is essentially an argument as to which central bank is going to continue a policy of monetary easing. The fact that the United States had such a poor employment number on Friday suggests to many traders that the Federal Reserve will have to do some type of quantitative easing in the short term. Because of this, the momentum has shifted back to the downside as all doubts of quantitative easing out of Washington have been raised.
Needless say, the Bank of Japan will continue to ease its monetary policy, and this should continue to work against the value of the Yen in general. However, this is one particular case where the Yen should continue to strengthen in the face of stronger than usual quantitative easing.
However, the 78 handle does look to be very solid in its support, and as such it is going to be difficult to break down below the bottom of the support area, which we see as the 76 handle. The real question will be whether or not the Bank of Japan chooses to intervene under the 78 handle. If it does, and can easily shoot this pair back up towards the 80 handle.
The reason we look at it this way is that the Bank of Japan has already admitted to clandestinely intervening in this currency pair recently. Because of this, it is prudent to pay attention to the subtle hints that they may be doing something. In fact, we already have one major hint in the sense that the 78 handle just cannot be broken below. We still favor going long of this pair, but recognize the fact that we could get a lower entry.