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The USD/JPY pair had a fairly quiet session during the Labor Day holiday in the United States on Monday. The pair currently sits within the band of support that we have been paying attention to between 78 and 78.75, and as such we still consider it a "buy only" pair. This market is currently being supported by the Bank of Japan, and various exporters in Japan.
Because of this, it is a somewhat artificially supported market but we do know that fighting central banks isn't the way we choose to trade. Because of this, we are more than willing to buy supportive action in this general vicinity, and hold onto it until we get at least to the 80 handle. We think that eventually this market is setting up for a multi-year rally, especially if the Federal Reserve disappoints with its expansion on monetary easing in September.
At this point in time, we are buying anything that approaches the 78 handle, and if we manage to break below it, we would become even more aggressive on the buy side as the Bank of Japan would certainly intervene sooner or later. We have been taking small bites of this trade, not piling in on one order. This is because there could be some volatility ahead and quite frankly this pair could sit still for some time.
In that sense, this is more of a long-term type of trade. If you look back to the 1990 finally bottom in this currency pair, it looks very similar to what's going on right now. When trends change that are this well-defined, it normally takes quite a bit of time and is in the instantaneous bounce that many people pretend that is common. In fact, one of the trickiest times to trade currency pair is when the trend is changing, as the news becomes very whippy.
We think this is what's going on in this market right now, and certainly don't want to trade against the Bank of Japan so the risk to reward ratio is much higher on the upside that it is selling. Perhaps the Bank of Japan eventually loses this battle, but we are more enticed by the fact that the upside has so much more room to run.