Friday August 13, 2010 - 21:03:48 GMT
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Dollar/Yen in Position to Post Weekly Reversal Bottom
The USD JPY is trading higher at the
mid-session, putting it in a position to close higher for the week. A close
above last weekâ€™s low at 85.48 will produce a weekly closing price reversal.
This formation, once confirmed by a follow-through rally next week, often leads
to the start of a 2 to 3 week retracement to a major 50% level, currently
identified as 89.55.
Todayâ€™s rally in the Dollar/Yen has helped
form a new main bottom on the daily chart at 84.73. Based on the short-term
range of 88.11 to 84.73, traders should watch for a possible test of a
retracement zone at 86.42 to 86.82. Based on todayâ€™s upside momentum, this area
is likely to be tested by the close.
The current two-day rally in the USD JPY
has most likely been a reaction to the â€śverbal interventionâ€ť by the Japanese
government earlier this week. Some traders feel the government will intervene
at this time, but doubts still linger about its effectiveness.
According to the Bank of Japan minutes from
the July 14-15 meeting published overnight, the BoJ is closely monitoring the
effect of a strong Yen and falling stock prices on the economy. If one interprets this to mean that the BoJ
is seriously considering an intervention at this time, then this news will act
as the catalyst to drive the Dollar/Yen sharply higher.
Throughout the entire financial crisis the
Dollar and the Yen have both benefitted from investorsâ€™ unwillingness to hold
on to risky assets. Most of the rally in the Yen has been traders seeking
shelter in safe-haven assets. The possibility of a rally in the Dollar/Yen
exists at this time because speculators feel the Japanese government will
intervene in order to protect the interest of its exporters. One key to this
rally taking place will be whether a stock market break will trigger a
flight-to-safety rally, thereby limiting gains in the Yen following an
intervention. In other words, if equities break hard, will the news of an
intervention be enough to counter-act the demand for the lower risk Japanese
Yen. If not, then the Yen seems destined to move higher.
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