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Thursday August 12, 2010 - 23:50:49 GMT
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Dollar/Yen in Position to Post Weekly Closing Price Reversal Bottom

The U.S. Dollar continued to mount its strong recovery against the major currencies on Thursday. The Dollar Index rose sharply, led primarily by a strong gain in the Dollar/Yen and reasonable advances against the commodity-linked currencies.


The weekly Dollar Index chart is in a position to post its strongest weekly gain since early May. The current rally was set up when the index held the .618 retracement level of the entire November to June rally from 75.03 to 89.22. Based on the short-term range of 89.22 to 80.17, look for this current rally to advance to perhaps 84.69 over the near-term.


The U.S. Dollar finished higher versus the Japanese Yen after Japanese Prime Minister Kan voiced his strong opinion about the recent movement in the Forex markets.


In what amounts to be a form of “verbal intervention”, Kan called the recent swings in the currency “rough”, and said they “are a little too rapid”. These are the strongest comments from the Japanese government which usually only says it is concerned about the movement in the currency and excessive volatility. Some traders believe the strong language used by Kan is a scare tactic which only represents an attempt to limit gains in the Yen and in no way should be interpreted as a precursor to an actual intervention.


Some traders rushed out to sell the Yen based on the comments, but the majority of market participants are said to believe that an intervention is unlikely for mostly logistic reasons. The likelihood of an intervention is small because they seldom work and the size needed to actually have an influence on the market would require the cooperation of the U.S. and other key central bank players.


Some Forex traders also believe that the recent rally in the Yen has been orderly and based on sound economic reasons. As long as the currency doesn’t swing violently or is influenced by excessive speculation, the chance of the Japanese government garnering support from other nations for an intervention remains remote.


The concerns voiced by Japanese officials are not without merit however. Their primary concern at this time is to protect the economy. By expressing strong opinions which may weaken the Yen, the government is doing its best to protect Japan’s export driven economy.


Another reason why an intervention may not work at this time is because the desire to buy the Yen is being triggered by safe-haven demand because of fear that the global economic recovery may be stalling. Declines in the Euro Zone and U.S. economies could fuel worries that the world’s economy is headed toward a double-dip recession. The action by the Fed earlier in the week has contributed to this growing pessimism. If a slowdown is confirmed, then investors may begin to buy the Yen more aggressively.


Technically, the USD JPY slid to a 15-year low on Wednesday before buyers stepped in to trigger a short-covering rally into the close. The follow-through rally overnight helped form a minor bottom at 84.73, but failed to garner enough upside momentum to trigger a clean closing price reversal bottom.


The strong rally and subsequent follow-through, however, has put the Dollar/Yen in a position to post a weekly closing price reversal. The key number to watch is last Friday’s close at 85.48. The Dollar/Yen close above this number today, but a close over this level on Friday will be a strong indication that this market is gearing up for a 2 to 3 week retracement.


Trading may get volatile overnight and during Friday’s day session because of the struggle between fundamental and news driven traders who believe a move by the Japanese government to weaken the Yen is inevitable. These traders may get support from technical traders who believe that the Dollar/Yen is oversold, but trend traders may prevail if demand for risky assets continues to decline, triggering an extension of the flight-to-quality break.


The importance of this developing weekly closing price reversal in the Dollar/Yen cannot be overemphasized at this point. This type of pattern has been known to generate 50% retracements over a 2 to 3 week period which means that a rally to 89.85 is possible over the short-run. Once again keep the focus on how this market behaves at 85.48 tomorrow. The action at this level will dictate how serious traders are about turning this pair around and could offer clues as to what the Japanese government’s next move is going to be.



The Greenback closed up against the commodity-linked currencies, extending it winning streak versus the Australian and New Zealand Dollars. Fears of a global economic slowdown fueled by this morning’s unexpected rise in unemployment claims, pressured equities which helped curtail investor demand for risky assets.


Some of the weakness in the Aussie was triggered last night after the Australian unemployment rate unexpectedly rose to 5.3 percent in July, compared to the median forecast of 5.1 percent. Further downside action was fueled by the U.S. Weekly Initial Claims Report which showed an increase of 2,000. This number pegged total claims at 484,000, the highest level since mid-February.


Technically, the Kiwi and Aussie are slightly oversold on the short-term charts, but the daily charts indicate further downside action is likely.


The New Zealand Dollar is nearing an uptrending Gann angle at .7048 which could produce a technical bounce, but ultimately downside momentum is likely to pressure this market into a 50% level at .6977. 


The Australian Dollar broke an uptrending Gann angle this morning, triggering stops. Look for an acceleration to the downside if the late July swing bottom at .8904 is violated. Although its primary downside target of .8644 is pretty far-off at this time. This pattern should not be taken lightly since it suggests that a major fundamental development may take place which drives this market sharply lower over the near-term. A combination of an uptrending Gann angle and the 50% level of .8644 suggest that this price may be tested on August 13th. Bad news from China may be the catalyst which triggers a free fall.



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