The Bank of Japan dropped a bomb on the market at the New York close about increased monitoring of the Yen-Carry trade. They expressed concern about hedge funds' excessive borrowing of cheap funds from Japanese banks that are invested internationally in higher yielding instruments. A possible fix for the BOJ would be to increase interest rates, which erodes the interest differential, thus strengthening the Yen, which sends USD/JPY, EUR/JPY, etc lower as we saw today. As mentioned this morning, I was short EUR/JPY all day and covered into the news for a profit after a long, painful battle in the New York session.

Regular readers know that we have been chomping at the bit for days to get a look at 118.00 USD/JPY. The trade setup is as technically clean as you'll find, but unfortunately we're taking the Bank of Japan head on by going with it. But so often the best trades find the fundamentals and technicals in completely opposite corners.

The 10-year downtrend line shown on the larger, monthly chart has been broken. Now, we need a re-test of it, but this time as support. The inset, 360 min chart shows the support test to be just above 118.00.

Drilling down to intra-day technicals, we get further confirmation that 118.25 is the ticket. The specifics of the price relationships between legs AB, BC, CD are labeled on the chart. Keep in mind that 118.00-25 is where the weekly trendline support would intersect this chart, because it's not shown. The plan is to bid in thirds at 118.32, 118.15, and 118.02 with stops just below 117.90, say 117.85. The initial target is the .618 retracement of leg C-D at 119.25. BOJ, look out, because here we come.

Todd Gordon is a Technical Currency Strategist and Fund Trader with GAIN Capital Group.

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