Forex Magnum


USD JPY – September Outlook

Autore: FX Empire Analyst - James Hyerczyk

The fear of an intervention by the Bank of Japan held the USD JPY in a narrow range for much of August helping to contribute to the miniscule loss of less than 1% for the month. Although a new low for the year was reached on August 19 when the market took out the March 2011 low at 76.37. This pair quickly turned around after reaching 75.94 as nervous traders quickly abandoned attempts to break this market lower on the thought that the central bank was poised to apply some pressure like they did earlier in the month.

Earlier in the month, the BoJ embarked on an aggressive intervention campaign, causing a 2% drop in the Yen against the U.S. Dollar. The decline in the Yen was its biggest in almost a year. Like the intervention attempted in March following the earthquake and tsunami, BoJ officials are hoping its third intervention of the year puts a bottom in the market allowing the Japanese economy to solidify its recovery from the March disaster.

With traders continuing to flock to low-risk, safe haven currencies amid signs of a slowing economy, the jury is still out as to whether the BoJ applied enough firepower to reach its objective. Traders seem to think the central bank still has the weapons to combat high volatility in the currency and rapid appreciation. The trading action throughout the month seems to indicate that traders are allowing this latest round of intervention to take hold.

Although the early August intervention low at 76.29 was taken out later in the month when the market reached 75.94, the quick turnaround to the upside seems to be indicating a growing respect for the Bank of Japan’s threat to intervene as many times as possible to prevent rapid currency appreciation for no other reason other than speculative purposes.

The appointment of a new Prime Minister with experience in intervention could also be sending a signal to speculators to back off the Japanese Yen and allow the currency to top out. With the economy still struggling to recover from the natural disasters earlier in the year, the BoJ needs to stop the Yen from appreciating because a high priced Yen hurts exports. The size of the intervention in August is a strong indication that the central bank is committed to weakening its currency.

As the global financial markets began to calm throughout August, coupled with the intervention, the USD JPY began to stabilize. Some chart watchers believe the sideways movement in the currency pair is creating a support base or a launching pad for the next rally. This is only likely to occur if demand for higher risk assets returns. If this happens then traders are likely to begin borrowing Yen to purchase these higher yielding assets. This could trigger a strong rally in the Dollar/Yen.

Technically, the USD JPY is trading inside a monthly range identified as 85.52 to 75.94. The retracement zone of this range is 80.73 to 81.86. This area along with a downtrending Gann angle at 80.52 are the next potential upside target. Although the market is likely to sell off following the first tests of these levels, a breakout through them will be a strong sign that the Yen has reached an important top.

In September traders should continue to fear an intervention, meaning that caution should be exercised when shorting the USD JPY near the low for the year at 75.94. Unless there is another global sell-off of higher risk assets, traders should avoid speculating heavily when the currency pair is nearing a new low.

On the upside, speculation that the U.S. Fed may initiate another quantitative easing program is helping to fuel a rally in the equity markets. This is helping the Dollar appreciate against the Yen. This action is likely to continue in September until at least the next Fed two day meeting on the 20th   and 21st. At that time, the Fed may reveal its new plan to stimulate theU.S. economy. If it means more free money, then look for equities to advance and the U.S. Dollar to depreciate against the Yen.


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