Yen Falls as Bank of Japan Expresses Concerns about Currency Rise

For a second consecutive day, the Japanese Yen is under pressure after a Bank of Japan official expressed his concern about the rise in the currency.

For a second consecutive day, the Japanese Yen is under pressure after a Bank of Japan official expressed his concern about the rise in the currency. Despite official denials, the BoJ seems ready to intervene if the Yen continues to appreciate too much. The Bank of Japan and the Japanese government want to avoid currency volatility. They both feel that that economic growth cannot be sustained if the Yen is fluctuating too much.

Yesterday, following an emergency meeting, the Bank of Japan voted to provide three-months of stimulus in order to avoid deflation. Overnight, Bank of Japan policymaker Shirakawa said he was open to adopting more measures to support the economy. This was a safe way of saying more stimulus was likely. Traders are reacting by selling the Yen.

While the fear of deflation is the main issue, critics believe the three-month stimulus announced yesterday will only provide short-term relief to the economy. This sets the stage for future appreciation in the Yen once the stimulus wears off, and a likely intervention in early 2010. This issue is likely to be addressed when the BoJ holds its regular meeting on December 17th.

Traders will be focusing on the U.S. ADP Report this morning. The report is expected to show that the pace of jobs loss in the U.S. is slowing, bringing the economy closer to sustaining its current recovery. The early estimate is for a job loss of 150,000 versus a loss of 203,000 in October. A stronger than expected report will lead to an increase in risk appetite which should pressure the Dollar.

This morning, the basket of currencies is trading steady to better. Last week’s low at 74.27 is still holding. A break through this level is likely to trigger a further decline to the April 2008 bottom at 73.67.

The EUR USD is trading flat. Traders are being a little hesitant about getting aggressively long at $1.51 ahead of the ADP Report. Support is coming from the news that the Dubai credit crisis is stabilizing and remains a local rather than global issue. Tomorrow’s European Central Bank meeting is also helping to limit speculation. The ECB is expected to leave interest rates unchanged while providing an outline of details on how it will wind down its stimulus packages.

The GBP USD overtook a key retracement level at 1.6646 last night. This price is now support along with 1.6575. A failure to hold these levels will be a sign that a secondary top is forming. The easing of concerns in Dubai is helping to boost demand for the British Pound along with a U.K. construction report which showed that the pace of contraction in this industry has slowed.

The USD CHF is trading in a tight and narrow range overnight with a slight bias to the downside. The Swiss Franc is trading at close to par with the Dollar on the news that the country emerged from its recession. A rapid rise in the Swiss Franc or excessive volatility against the Euro is likely to attract fresh selling by the Swiss National Bank. This action may help the Dollar to rebound.

The USD CAD is trading a little better overnight on light volume ahead of today’s U.S. employment report. This currency pair is currently straddling .618 support at 1.0459. Yesterday, the Canadian Dollar rose on the news that Russia was adding the currency to its Forex reserves. This action coupled with a strong rise in equities and a firm crude oil market helped the USD CAD break through recent bottoms at 1.0449 and 1.0416.

Stronger demand for higher yielding currencies is helping to boost the AUD USD and NZD USD. Yesterday the Reserve Bank of Australia announced a 25 basis point rate hike to 3.75 percent. Gains were limited, however, when the RBA hinted in its statement that inflation would remain in check. Traders interpreted this as a sign that the pace of interest rate hikes would slow. Overnight, the Aussie is trading higher, but remains slightly below the last main top at .9322. Falling back below .9230 will be a sign of weakness.

The NZD USD is trading higher but the pace of the rally is slowing as the market has reached a retracement zone at .7272 to .7332. Gann angle resistance at .7283 is providing additional resistance. Upside momentum could take this market to .7332 – .7335 later today.