By Martin tillier
As an old FX guy, it is great fun to see the focus that Forex, and USD/JPY in particular, is getting right now. It seems that everybody wants to play. About a month ago, I wrote this, which basically amounted to a recommendation to buy USD/JPY at around 93.50. I didn’t know that the BOJ was going to double down again on their QE, but I did caution against opposing a determined Central Bank.
Now, as USD/JPY is at levels not seen for four years, and approaches the psychologically important 100 level, I am going to issue another word of warning. Faced with a large, almost straight line move up, such as Dollar Yen has seen over the last few months, most traders and investors get contrarian urges. It is only natural. There is nothing wrong with trying to pick the top, I’ll be doing it myself, but don’t assume that 100 will be it.
When I worked in the Forex market, I developed an image in my head of “the market.” It existed as some kind of nefarious entity, whose main purposes in life were to make me look foolish and to make me lose money. It isn’t a bad image to keep in your head right now.
I can assure you that interbank traders will be watching the 100 level closely, but not because it has any particular technical significance to them. Rather it is because they know that the level will bring a flood of new money to the table, money they believe should be easy to take. Poker players call this “dead money”; the big pile of cash brought to the table by a new player, who knows neither the other players nor the game very well. Don’t be the dead money.
In my experience it is likely that USD/JPY will pause briefly at around 100; that is almost inevitable as new sellers are attracted to the market, but then “the market” will rear its ugly head and continue the push up.
Once all of those new shorts have been squeezed out and had their “welcome to forex” moment it is possible that a top will be found, at least temporarily. I would think somewhere around 103-104 should cause enough pain.
What happens from there depends largely on the BOJ. If they continue to buy securities at a rate high enough to continue the devaluing of the Yen, it may go higher still in the medium term. In the short term, however, once that 103-104 level is reached it is likely that all of the big players will be long and a correction back below 100 could well come.
My advice, then, would be to be very wary of being suckered in by the round number. To paid traders it means nothing except a chance to take some of your money and add it to their bonus.