Like it or not, central bankers just engineered a breakout in the USD.  Now, all they have to do is convince investors that this is a good thing.Of course, by “good,” we’re not talking about macroeconomic impact on inflation, trade, or employment.  Those things might matter to the few portfolio managers still focused on fundamentally-based investing — but, not to the folks actually driving Mr Market.

We’re talking about the yen carry trade, which drives trillions in investments worldwide and has been almost solely responsible for the unending rally since 2011.

The yen carry trade thrives on dollar strength and yen weakness.  So, it absolutely loves the idea of a dollar/USDJPY breakout — as long as it lasts.continued for members…TPTB might allow a sell-off, if for no other reason than to portray some semblance of legitimacy.  If so, it should be limited to the .786 Fib at 2077.45.  But I fully expect the “market” to ultimately cast its lot with the yen carry trade and trade higher off the currency moves.We have never had a breakout in the USDJPY in the past four years that wasn’t accompanied by a rise in stock prices.  But, it only works if carry trade investors believe it will continue to rise.  A day or two above the SMA100 won’t be enough.One potential hitch, however, is EURUSD.  The last time it plunged in value, it dinged equities pretty well.  Today, it broke down well below support.Wednesday, SPX broke down from a pretty well-formed rising wedge.  But, it’s gone sideways ever since.  A drop into the close today or Monday would provide a much needed backtest of the SMA200 or at least the .786 at 2077.This could help establish a rising channel (in purple) based on the wedge’s upper bound with a midline at the .786.  I’d play along on the downside in anticipation of this move.All it would take is a backtest by USDJPY, which will run into resistance at 123.77, or a continued plunge in CL — which is somewhat likely if the dollar’s breakout lasts.UPDATE:  9:49 AM

Starting to get some movement.  The 2077.45 tag would ideally come around 12:00 EST.UPDATE:  10:02 AM

Testing our first target, the SMA10.  Watch for a bounce here.UPDATE:  10:07 AM

Plowed through the SMA10 with no problems, though fairly restrained so far.  Just reached the puruple .886, which is another potential bounce spot for a backtest of the SMA10 and red channel midline.Just noticed that ES tagged a TL of potential support.  I’ll switch back to long here at 2083.75 until we can see what kind of reaction we get.  Very tight stops, though, as a sudden reversal in USDJPY could overcome ES’s reticence.

UPDATE:  10:43 AM

Potential turning point here at the red channel .786 line.  But, USDJPY still going strong.  I’ll go back to short at the first sign of weakness.UPDATE:  10:52 AM

Looks like it might be running out of gas.  USDJPY too.  I’ll take profits here at 2094.79 and switch back to short.One potential path for USDJPY. And, it gives us a pattern by which to judge whether or not USDJPY will breakout or down.  And the timing would work well with our 2077.45 target at 12:00.UPDATE:  1:50 PM

This is getting pretty annoying — another one of those days where you could spend hours waiting for the last 7 points of the decline.  And, it’s being propped up at every opportunity.  I’m cutting loose the short here, but would gladly jump back in if it ever gets going.

CL and USDJPY have been flatlined for hours… All it would take to blow out the longs or shorts is a dip or spike in either one.  And, that’s no way to spend a Friday afternoon!

UPDATE:  2:06 PM

Last chance for a decline.  I’ll try a short position here at 2098 with tight stops.  I’d put the odds at no more than 50:50, but with 20 points of downside potential against a 3-pt potential loss (stops) it’s not a bad bet.UPDATE:  2:32 PM

I have to run out for a meeting.  But, I’d recommend taking profits here or – if you can monitor it closely – holding short into the close or to 2077.45 (whichever comes first), with trailing stops.  Either leaves us with a 1%+ gain on the day. I would not hold short over the weekend.USDJPY and CL are finally cracking just a little.  As always, keep an eye on them as they could easily derail any selloff from this point.

I’ll post more either tonight or over the weekend.  Lots to talk about after these big currency moves.

GLTA.