USD/JPY fell pretty precipitously on Tuesday, as the 78 handle finally gave way. This is an area I have been wanting in this pair with great interest over the last several weeks as you can see on the chart it has been massively supportive.
If you look back in time, you could see this was an area that was massively resistive, so it makes sense that support came in at this point. Also, you can see that the pair managed to smash through it in relatively short order a while back, and it does line up with just about when the Bank of Japan admitted to clandestinely intervening in this currency pair. It is because of this, that I feel the Bank of Japan has been holding up the 78 level recently.
Now that is been violated, one thing that I cannot get around is the fact that the Federal Reserve could add to quantitative easing on Thursday. I believe that the Bank of Japan is waiting to see what the Fed does before it make its move. I do fully believe that below 78, the chances of a Bank of Japan intervention in this pair expands greatly.
Friday will be interesting
Once we get through the Thursday session, it will be interesting to see how the spare reacts. If the Federal Reserve doesn't do enough to placate the markets, this pair will skyrocket. After all, this pair is a fight between two central banks that are "racing to the bottom" as far as their currencies are concerned.
On the other hand, the fed could step in and do more than people expect. If that's the case we could see this pair fall, but I think it would be only a matter of time before the Bank of Japan gets involved. They would more than likely intervene once the initial knee-jerk reaction has been fulfilled. Because of this I am not willing to short despair right now. In fact, I believe that's now is the time to start looking for reasons to go long. Of course, with all of the headline risks out there, I am not willing to do it until we get through Thursday session.