December Treasury Bonds broke on Friday as investors shed
safer assets in favor of higher-yielding risky assets. The main trend remained
up on the daily chart while the market completed a 50% retracement of the 124â€™22
to 135â€™19 range. The first target was 130â€™17. The market tested 130â€™12.
Fundamentally, the jobs report drove down T-Bonds, but the
weaker ISM Services report helped drive them higher off the low, setting up a
possible retracement to the upside next week.If T-Bonds set up a secondary lower top, then look for another break to
the downside with 129â€™11 the next likely target.
Once again this current move looks like a normal correction
and not â€śthe bubble burstingâ€ť as some analysts want to believe.
The September Japanese Yen traded sharply lower Friday
morning, but the losses faded after a report showed the U.S. Services Sector
slowed during August. The rise in demand for stocks appeared to be reviving the
carry trade earlier in the session. This is a situation where investors borrow
the lower yielding Yen then sell it to invest in higher yielding assets.
Fridayâ€™s trading action in the Japanese Yen suggests that traders canâ€™t make up
their minds as to whether risk is on or risk is off.
The Japanese Yen began to strengthen against the Dollar
after the weak U.S. ISM Services index indicated slower growth. The Dollar/Yen
pared its gains while some traders took defensive positions against the
possibility of a weaker U.S.
The chart pattern suggests a possible double-top formation.
This pattern will be confirmed if 1.1641 is broken and at the same time will
signal a change in trend to down.
Fridayâ€™s better than expected U.S. Non-Farm Payrolls data
put risk back on the table. Although this report showed that the economy was
still shedding jobs, private sector hiring was above the consensus, driving
investors into equities and out of gold and Treasuries.
The shift in risk sentiment drove the U.S. Dollar lower
especially against the commodity-linked currencies. The Japanese Yen was also
punished as traders left the safety of the lower yielding currency.
Upside momentum was building in the September Australian
Dollar, putting it in a position to test the early August top at .9221. Recent
Aussie economic data also led to speculation that the Reserve Bank of Australia
would raise interest rates at its next meeting on September 7.
The strong rise in the September Euro is a sign that
investors are becoming confident that European economies may be emerging
slightly ahead of the U.S.
economy, carried by great economic numbers from Germany.
Earlier in the week, the European Central Bank left interest
rates unchanged, but post report comments from ECB President Jean Claude
Trichet provided some support for the single currency when he announced that
the central bank would continue to provide a range of emergency funding to
commercial banks through the end of 2010. He also downplayed the strength of
the economic numbers which he tends to do each time the Euro Zone economy
appears to be turning the corner.
Thin trading conditions may have contributed to the sharp
break in the Dollar this week, so we are likely to find out next week where
investors stand on the Greenback. Although the U.S. employment data was slightly
better than expected, the country did lose jobs for the month. Some feel that
this report took some of the pressure off the Fed to implement additional
quantitative easing, but others remain concerned about the slow down in the
economy because of todayâ€™s weaker ISM services data.
If T-Bonds continue to break and equities rise, then this
will be a sign that trader appetite for risk is back on. This will lead to more
pressure on the Dollar. The tricky market will be the Dollar/Yen. The revival
of the carry-trade will pressure the Yen, but further weakening in the U.S.
economy may encourage traders to dump the Dollar in favor of the Yen. If this
occurs, then look for renewed talk about Japanese government and Bank of Japan
intervention. The Yen by far will be the most difficult market to assess over
the short-run and should be avoided until the catalyst driving this market can
be identified with clarity and conviction.
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