The Bank of Japan cut interest rates overnight producing a short-lived rally for the USD/JPY. The announcement of a temporary fund to mop up Japanese government bonds and other short-term securities not only disappointed markets, but also sent bond yields lower worldwide.

The diminishing yield differential once again caused speculators to dump the US Dollar, which has been under constant pressure stemming from the Fed's QE 2 talk. The Greenback's strong inverse correlation with risk appetite has provided certainty in uncertain markets, leading investors to buy equities and commodities with confidence.

Japan is sending the wrong message. While the yen has been somewhat of an exception to the recent bout of dollar weakness, the Ministry of Finance's intervention and the BOJ's announcement are not viewed as a strong enough commitment. As a result, speculators have continued to buy the yen on any dip.

The Japanese should take a page out of Hank Paulson's playbook, when he got the approval to set up an emergency fund to save Fannie & Freddie. He assured Congress that setting up a sizeable fund was like a bazooka and as long as the market knew one had it, one wouldn't need to take it out and use it. Paulson's ploy worked and market nerves were calmed.

The BOJ would also need to adopt a more powerful message in order to weaken their currency. A pledge to provide more QE than any other central bank would provide a well-needed psychological ceiling for the yen. Meanwhile, speculators will continue to nibble at the yen until the Fed hints of reversing its multi-trillion dollar portfolio. This suggests it will take a much more costly intervention until the current Japanese regime learns how to communicate properly with the market.

From a technical perspective, the USD/JPY remains firmly entrenched within a bear market. While the DXY & USD/JPY remain highly correlated since the intervention peak, the yen has not appreciated to the same extent as other foreign currencies vs. the Greenback. While there is a possibility that a marginal test of the pre-intervention low could eventually mark a USD/JPY double bottom, only back above the 86 handle will suggest that a material low is in place.

POSITION: LONG USD/JPY at 83.50, risking 82.70, targeting 85.17