- USD/JPY shows hesitation after an early rally, but support levels and yield differentials continue to favor the dollar.
- Carry trade dynamics and structural Japanese policy constraints suggest pullbacks remain buying opportunities.
The US dollar initially tried to rally against the Japanese yen but then rolled over to show signs of hesitation on the bullish side. That being said, the 155 yen level does look like it's trying to offer a little bit of support. And therefore, I think this could end up being a small buying opportunity. I recognize that there are a lot of questions right now about the Federal Reserve and what's happening next. But at this point, the one thing that I do know is that the interest rate differential will continue to favor the US dollar.
Carry Trade Dynamics Still Favor the Dollar
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Therefore, over the longer term, it should favor this pair going higher. Even if we were to break down from here, the 50-day EMA comes into the picture at just about 154 yen to offer support and then again at 152 yen, which I think is more likely than not, we do get a little bit of a pullback, but I think it ends up being a buying opportunity. That'll be especially true once we get through the Bank of Japan later this week.
And therefore, I think a little bit of choppy sideways volatility makes a certain amount of sense. But as I've been saying for months, I've been holding this pair. I get paid every day to hold this pair. That's the power of the carry trade. And the carry trade is expected to be a big thing again, especially if the United States remains a little more hawkish than originally thought.
And most of the leading economic numbers in the United States do suggest that 2026 may not be a bad year for the US economy at all. With this, and the fact that the Japanese have a structural problem with the ability to really tighten monetary policy, I think these dips continue to offer buying opportunities if you're patient enough, probably a much longer-term one, but even shorter-term traders are jumping on this train.
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