Weak Equity Markets Trigger Rally in USD JPY

Risk aversion returned to the foreign currency markets overnighttriggered by a sell-off in Asian equity markets. Early today, it wasreported that Japan’s economy grew in the second quarter, but the ratewas less than expected. Although this news signaled the end of therecession, sellers still felt the need to liquidate long equitypositions as the gain did not meet economists’ expectations.

Daily Analysis

USD JPY

Risk aversion returned to the foreign currency markets overnight triggered by a sell-off in Asian equity markets. Early today, it was reported that Japan’s economy grew in the second quarter, but the rate was less than expected. Although this news signaled the end of the recession, sellers still felt the need to liquidate long equity positions as the gain did not meet economists’ expectations.

The news regarding the Japanese GDP was the first report of growth in the economy in 5 quarters. It reflected both growing exports and the effects of government stimulus. Traders for the most part ignored the report and instead focused on the breaking stock markets for direction. Many traders are reluctant to commit to a long Yen until the economic numbers prove to be sustainable. It’s one thing to end a recession and another to maintain enough momentum to sustain a recovery.

The Chinese market led the sell-off as investors fled stocks for the safety of lower-yielding currencies such as the U.S. Dollar and Japanese Yen. The Japanese Yen is actually up versus the Dollar as investors repatriate funds removed from U.S. equity markets. Investment firms that borrowed Yen to fund the stock rally are now liquidating their equity positions and buying Yen to payback their loans.

The weekly chart indicates that downside momentum is building which should be enough to break through a key 50% retracement level at 94.75. If USD JPY can hold this level then look for a push toward the .618 retracement level at 94.04.

GBP USD

The GBP USD also under pressure this morning. This is a combination of technical factors and the news overnight that U.K. home sellers lowered asking prices in August.

The Pound topped out on August 6th following an announcement by the Bank of England that it would expand and extend its quantitative easing program. Since this announcement the Pound has weakened substantially even triggering a bearish closing price reversal top on the weekly chart. The decision by the BoE sent a signal to traders that the U.K. economy was still in bad shape.

The weak economic condition was reaffirmed on August 12th when BoE Governor Mervyn King stated that the global economy was in “deep recession” and that banks may need to raise more capital.

Besides the negative home price news, pressure is also on the British Pound this morning because of risk aversion. The combination of bearish factors this morning has put the Pound in a position to perhaps test a major retracement zone at 1.5271 to 1.4854 over the intermediate term.

James A. Hyerczyk has been actively involved in the futures markets since 1982. He has worked in various capacities within the futures industry from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis. His firm, J.A.H. Research and Trading publishes The Forex Pattern Price Time Report... More

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