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May 22, 2013

Time for a Yen Rally

Sunday night, the Bank of Japan announced that further weakness in the yen could damage the Japanese economy. Their statement was naturally interpreted as meaning the BoJ was ready to put a floor on the yen's decline, and the price of the currency gapped higher against major currencies.

Markets, however, rarely make a trade so easy, and after a couple days of tepid strength, the yen rolled over and broke to new lows. Is the BoJ losing control? I don't think so. A more likely scenario is that the early chasers of this announcement are being shaken out.

That massive volume under the breakdown is a tell-tale sign of stops being run. If we see the yen reverse the breakdown in coming hours, a huge snap-back rally could develop.


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