The USD JPY closed up on Friday, but was still lower for the week. Today’s action confirmed Wednesday’s closing price reversal bottom, but all this indicates is the possibility of a short-covering rally back to 84.62 to 84.93. What I really wanted to see was a close over last week’s settlement at 84.28.
This morning, the Dollar/Yen regained 84.28 for a short-period of time, trading up to 84.37 before buying dried up. This indicates that the rally was most likely short-covering rather than fresh longs because of the way the market drifted lower throughout the rest of the day and into the close.
Stronger demand for higher risk assets as well as the threat of an intervention by the Japanese government and the Bank of Japan was the catalyst behind this week’s bottoming action.
The daily reversal bottom pattern usually lasts 2 to 3 days and ends inside of a short-term retracement zone, but they have been known to start even larger rallies. This is possible with the current set-up. Money has been shifting out of Gold and T-Bonds and big investors may be gearing up to invest these funds in the equity markets.
If this occurs, then look for a revival in the carry trade. This occurs when investors, sensing the start of an increase in appetite for risk, borrow in Japan, convert the Yen to Dollars and buy riskier assets.
The set-up is there, the market just needs some muscle behind it to follow-through. This may occur next week when many large traders and institutions are expected to return to the trading arena after the Jewish holiday and the extended end-of-summer vacations.
Stocks Flat to Better; Obama Fails to Trigger any Interest
U.S. equity futures traded higher but inside of a range that held all morning. Money continued to flow out of T-Bonds and Gold which may be an indication that investors are gearing up for a stock market rally next week.
It was a slow morning for economic reports, but today’s business inventories number seemed to have underpinned the markets a little. The sideways action in the markets most of this week may have been attributed to the Jewish holiday, late summer vacations, uncertainty regarding the economy and the upcoming November elections.
Investors should be focusing on the movement of cash at this time. The money leaving the Treasury and Gold markets has to be put to work at some time and the stock market seems to be the most likely place to invest.
The liquidation of so-called safer assets helped to pressure December Treasury Bonds. The main trend turned down on the daily chart for the first time in several months after the last swing bottom at 130’12 was violated. The next downside objective is a Fib level at 129’11. The daily swing chart indicates 128’05 is a potential downside target by September 17.
President Obama’s press conference failed to generate any interest from traders although you can build a case that he didn’t say anything to break it either. He continued to push for the extension of the Bush tax cuts; however, he reiterated his attack on Republicans which turned off traders in my opinion.
Don’t be surprised by an intervention in the Japanese Yen over the week-end. This could drive up demand for risky assets.
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