Consider selling into any short-term strength in the US dollar/Japanese yen (USD/JPY) exchange rate. It is three months since we last looked at this pair (Forex, SHARES 14 Jan) and it is fair to say it has not been a dull period, with moves confounding many market watchers. Back then the 115 area for USD/JPY was identified as good support, marking a 12 month low and suggesting that buyers may want to position themselves for the possibility of one last hurrah from the currency pair. That transpired and it really was the last gasp for the dollar. The 115 level was broken convincingly during February and the yen has since moved to a 17-month high - or, USD/JPY is at a 17-month low.

So why has this been confusing for market watchers? Well first of all it goes completely against the central bank, the Bank of Japan’s (BoJ) efforts, to try and force a weaker yen. Japan slipped back into recession last year, the fourth one since the financial crisis. The Bank of Japan has tried various approaches to stimulate its economy, particularly exports. Quantitative easing and negative interest rates are just a couple of examples. And yet, the yen has strengthened as can be seen by the plunge in the value of USD/JPY.

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There is a meeting of the central bank at the end of this month - 28 April - and we could well see them take more stimulus measures to try and turn the yen around. It is possible there could even be some intervention in the foreign exchange markets - the chief cabinet secretary said last week: ‘We’re watching the foreign exchange market with a sense of tension, and we’ll take measures as appropriate’. There are two sides to any foreign exchange puzzle and the decreasing expectations of a US rate increase in the immediate future has also turned traders away from the US dollar, making other currencies more attractive.

The moves this year - adding up to a more than 10% appreciation for the yen - have really changed the trend on the chart. The trend for this year in USD/JPY is now firmly down having finished off the rise from October 2012. But blindly selling a falling currency pair in the hope of easy gains is seldom an easy trade. Because of the fierceness of the dive in USD/JPY it is looking very oversold and any half decent rally could see some panicky short-covering, squeezing the market higher. There are also likely to be a fair amount of jitters ahead of the central bank meeting at the end of this month.

(Click on chart to enlarge)

After the initial move below 115, the 114/115 level proved to be strong resistance so for the medium term trader it looks like stop losses need to go above here. Strength back towards 114 is expected to run out of steam at the moment. When it comes to targets, the 105/106 area was support, albeit briefly, towards the end of 2014. A break below here could well accelerate any weakness, targeting what looks to be very strong support ahead of the 100 mark.

It looks like interesting times ahead for USD/JPY and the Japanese economy. A bounce could well be a strong one as traders look to exit existing shorts, but any rallies would be expected to falter and for USD/JPY to continue this new trend. Waiting until this month’s central bank meeting is out of the way is the sensible strategy here as there could well be plenty of odd moves in the run up to whatever the BoJ decide to do next.