Forex Magnum

Last week the USD JPY hit a record low following a drive to 75.76. Many traders were surprised by the pair’s volatile movement since there didn’t appear to be any reason for the decline to the lowest level since World War II. Some traders feel it was triggered by speculation that European finance ministers were about to announce a solution to their bank recapitalization and debt restructuring problems. The reaction by Dollar/Yen traders may have been premature since policymakers closed out the week without a comprehensive plan.

Having a few days to study the news and look at the chart pattern, it seems the move was most likely triggered by sell stops rather than fresh shorting. Now that Dollar/Yen traders may have tipped their trade ahead of the summit resolution, one has to wonder if the Bank of Japan will be waiting for the next attempt to rally the Yen. It’s no secret that it is committed to vigorously defending against a rise in the Yen.

With the possibility of another round of intervention looming, it’s hard to believe that new short positions will be aggressively placed at current levels. If traders succeed in driving the USD JPY lower this week, then this is likely to serve as a sign that the central bank is easing up on its stance. This could open the door to a sharp drop in this pair due to pent up trading caused by the recent prolonged sideways action.

All this speculation that the U.S. Dollar declined against the Japanese Yen because of position squaring or Dollar liquidation ahead of the European Summit may have been put to a rest this week-end whenJapan’s finance minister Jun Azumi warned traders about taking speculative positions in the Japanese Yen. Azumi was quoted saying the move in the Dollar/Yen last week was not based on economic fundamentals but rather on speculation. He furthered warned that intervention would likely take place if another attempt to rally the Japanese Yen becomes excessive.

The key to trading the USD/JPY this week will be figuring out at which level an intervention is likely to take place. Will it be a lingering trade under 76.00 or will it be shortly after a penetration of 75.00? So far this week-end’s verbal intervention is helping to rally the Dollar/Yen. This may be a reaction to the indecision inEuropeand the intervention threat. Based on comments fromEurope, traders may wait until Wednesday before making another attempt to drive the Japanese Yen higher.