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Where the Yen Is Headed Next

Akio Kon | Bloomberg | Getty Images

Selling the yen has been the hottest currency trade for several months now. But ever since the Bank of Japan announced stimulus plans that fell short of investor expectations, the yen has been bouncing back.

Is the freefall over?

Not likely, says Kathy Lien, a managing director at BK Asset Management and a CNBC contributor. "I think it's basically profit taking after such an extended move," she told CNBC's Melissa Lee.

In Lien's view, investors set the bar so high for Bank of Japan action that the risk of disappointment was high. "The BOJ needed to deliver everything on point in order for dollar-yean to continue to rally," she says. What they did come up with - an inflation target of 2%, up from 1%, and stimulus starting in 2014 - "just wasn't enough for the market."

(Read more: Quantitative Easing: CNBC Explains)

At the same time, U.S. interest rates have been under pressure, which is helping to send the dollar lower.

Lien is not expecting the yen's strength to last for long, however. She points out that the Bank of Japan this spring is expected to bring in a new governor who favors more aggressive stimulus. And although the dollar has weakened against the yen, "we haven't seen the pullback in yen-funded carry trades" against higher yielding currencies like the Australian and New Zealand dollars.

So Lien wants to wait for the yen's rally to peter out, probably at 86.00 against the dollar. At that point she wants to buy the dollar against the yen with a stop at 84.50 and a target of 89.00.

Whether the yen will break through 90.00 is unclear, Lien says, but she thinks 89.00 is quite achievable. "If the Bank of Japan is successful at getting inflation to 0.5% - forget about 2% - that would e consistent with a 95.00 dollar-yen."

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