The British pound has rallied against the Japanese yen during trading on Thursday as we continue to see the carry trade pick up steam.
The interest rate differential alone is reason enough for people to buy this pair, but we have recently seen interbank headwinds as the Bank of Japan has intervened to prop up the Japanese yen.
That being said, the Japanese have done this 3 times, and we still find ourselves fighting the same battle. With that being the case, it is a market that could be a little bit nerve-wracking for some, but as a general rule, interventions only slow down a move; they don't necessarily turn them around.
They can, of course, but in general, it's more likely to be a situation that slows down the deterioration of the yen. This remains to be seen, but in general, I see these moves as applying the brakes”, not “turning the car around” about 90% of the time.
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Interest Rate Differentials and Technical Outlook
This is why I like the GBP/JPY pair: the interest rate differential is such that you get paid at the end of every day, and by a fairly wide margin from interest rate differentials. If you hang on to a position long enough, it becomes an important part of the strategy.
Ultimately, I do think that the Japanese yen has a problem with the overall longer-term economy versus the interest rate situation. I do think this is a situation where volatility could come into play, but I also recognize that the path of least resistance, apart from some type of intervention, is probably a run back toward the 219 yen level.
The market has broken above the 50-day EMA, showing signs of life again, and could continue to look at the 215 yen level as support, which has been fairly reliable over the last 5 or 6 trading sessions.
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