What to Know
- Higher U.S. Treasury yields continue supporting the U.S. dollar.
- AUD/USD is testing resistance near the 0.70 level and the 50-day EMA.
- A breakout above 0.70 could target the 0.7150 area.
- USD/JPY remains in a strong long-term uptrend backed by interest rate divergence.
- Bank of Japan intervention remains a key risk for USD/JPY bulls.
The backdrop right now, of course, is one of higher interest rates in the United States, and that has a direct influence on how certain things behave. We have a lot of uncertainty in the Middle East, and a lot of what we are seeing in the bond market is a direct result of that uncertainty, with the idea being that energy inflation could be a massive problem.
That being said, the markets do remain very volatile and very choppy, and therefore some of the moves are erratic to say the least. In this analysis, I have picked a couple of pairs that I think are somewhat stable despite the fact that the world is so chaotic.
AUD/USD
The Australian dollar has been grinding a bit higher during the trading session on Tuesday, and we are fighting the 50-day EMA. This is an interesting point to me because this is an area that we've seen some noise at, the 0.70 level. It's a large round figure, and we continue to struggle. I'm watching interest rates in America. They are up a little bit over the last couple of hours, and that could put downward pressure towards the 0.6950 level. However, if we can clear this area, that gives you escape velocity to 0.7150. I think ultimately, though, this is an area you are going to see a bit of a struggle, and you may see a bit of a pullback.
USD/JPY
The US dollar continues to grind higher against the Japanese yen, and that's been the case for what seems like a lifetime at this point. The only real moves that we've seen against the dollar have been initiated by the Bank of Japan. I have been long of this pair for months. I add to it every time it drops, and you can see how that's worked out, including the last intervention candle when everybody else was losing their minds, freaking out; I was adding little bits and pieces because it pays you at the end of every day.
Now, the key, of course, was I wasn't adding massive amounts that could wipe me out. I was prepared for a multi-week drawdown. Turns out there was only one or two other red candles after that, so I got a little lucky. But the long-term plan was always to hold the US dollar.
In fact, based on longer-term charts, I wouldn't be surprised at all to see this pair go to 224 yen. That is based on a rounding bottom that we just broke out of that goes back to 1986. That's how big of a move this could be. That doesn't mean it gets there tomorrow, nor does it mean that the Bank of Japan won't intervene occasionally to try to slow down this freight train. But the situation in Japan is dire. No inflation, cannot handle higher interest rates, at least not much more than we've got here. And US inflation and interest rates continue to climb. This is a perfect storm, at least from a fundamental standpoint.
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