USD/JPY is in a downtrend for well-established reasons (QE in the US, deflation in Japan, etc.). In recent months the market has closely tracked the 10-year Treasury yield, but now USD/JPY has broken out while the 10-year Treasury yield has not. This makes me nervous about the trade, but it may be that the 10-year yield is hitting a low — it can’t go down forever — while the same drivers push the JPY ever higher.

I have kept out of this market recently because I have been worried — too worried — about intervention by the Japanese authorities. Looking at the intraday chart, however, I can see three instances of suspiciously high overnight volume (highlighted in the top charts, below). It looks like on the first occasion (bottom chart) the market saw the intervention and ran strongly upwards thereafter without help; on the next two occasions, however, the market was less convinced and swiftly resumed a downward course. The Japanese authorities know, I suspect, that they cannot turn the JPY around against the USD by intervention, and their objective must therefore be to slow its appreciation. This is not inconsistent with a short position.

Trading breakouts has worked over the past five years in this market, but has only broken even in the latest downtrend. Trading breakouts with a longer holding period has worked. This is a trade that could run for a long time — after its long deflation, there is an argument that the JPY is still undervalued against the USD — and so I am prepared to take a trade with a view to a longer holding period.

Essentially, the trend is there and there has been a signal. I believe in the trend. And so I have traded.