After sitting inside of a range for six days while waiting for a decision from the Japanese government and the Bank of Japan regarding a possible intervention, the USD JPY finally broke to a new low for the year on Tuesday. Volatility which had been compressed while the market remained inside the range, expanded.
Traders ignored strong words from Japanese Finance Minister Yoshihiko Noda sending a signal that they believe the Japanese government and the Bank of Japan were not ready to back up those words with direct market action.
Noda said at a news conference that the recent moves in the Japanese Yen are clearly one-sided and that disorderly moves can be harmful to economic stability. In the recent past traders would have responded to this “verbal intervention” by covering short Dollar/Yen positions, but this time, having heard this language before, decided to ignore the comments and react to growing global demand for safer lower-yielding assets instead.
This morning the markets reacted as if it was business as usual. Investors shed risky assets and placed the proceeds into the lower yielding Japanese Yen for safe-keeping. This drove the Yen higher. There doesn’t seem to be any disruptive trading or overt speculation at this time. This is probably frustrating to Japanese officials who seem to believe that there is disorder in the markets.
While it may be true that the high priced Yen can have a detrimental effect on the economy, nothing is going to stop the decline if investor sentiment is triggering a shift out of risky assets.
Japan has not intervened in the currency markets since 2004. At that time it sold 35 trillion Yen in 15 months through March 2004. The markets today are a little more sophisticated. Institutions and hedge funds have the power to combat a central bank’s intervention which is probably why Japanese officials are hesitant at this time to make such a move.
If Japan intervenes and the market absorbs the great influx of Yen supply then the action will have no long-term effect on valuation and only serve to put more Yen into the open market.
Another reason why a successful intervention is not likely at this time is that in order to work, an intervention has to have the cooperation of other central banks. With all nations seemingly battling economic woes of their own, this cooperation doesn’t seem forthcoming at this time.
Technically, the USD JPY main trend is down. The trend will change to up on a move through 85.91, but this seems unlikely at this time since the old bottoms at 84.73 and 84.89 are likely to become new resistance and limit gains.
The AUD USD closed lower. Traders dumped risky assets this morning as the outlook for the global economy worsened. Traders are also worried about the outcome of last weekend’s election. The longer the hung parliament situation lingers, the more confidence investors lose. Investors want the election settled so that stability can return to the country. At this time questions have to be answered regarding the taxing of mining companies. The newly proposed taxes will have a direct effect on Australian exports. Downside momentum could drive this market into an uptrending 50% Gann angle at .87.17.
The Euro finished higher after testing a major 50% level early in the trading session. Technically the market is trading inside of the 1.1876 to 1.3334 range. The mid-point of this range is 1.2605, the Fibonacci retracement price is 1.2433.
This morning the market tested 1.2605 and penetrated it slightly before regaining it slightly after the U.S. opening. At the mid-session, the EUR USD was trading higher and by the close, posted a daily closing price reversal. This pattern often leads to the start of a 2 to 3-day rally.
All is not rosy however for the Euro. If sellers continue to exert pressure and 1.2605 fails to hold on the next retest, then look for the market to continue to decline to 1.2433.
This morning the GBP USD continued its downtrend by breaking a minor .618 retracement level at 1.5457. Buyers stepped in to rally the Sterling, but the buying power wasn’t strong enough to post a daily closing price reversal bottom. At the midsession, the British Pound found resistance on a downtrending Gann angle from the 1.5997 top at 1.5757. The subsequent selling pressure and the close below the Fib level indicates lower markets to follow. The charts indicate that the market is set-up for a potential freefall to a major 50% level at 1.5113.
Trading could be light and tight on Wednesday, one day ahead of Federal Reserve Chairman Bernanke’s speech before central bankers at the conference at Jackson Hole, Wyoming.
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