Dollar/Yen in Position to Post Weekly Closing Price Reversal Bottom

The U.S. Dollar continued to mount its strong recoveryagainst the major currencies on Thursday. The Dollar Index rose sharply, ledprimarily by a strong gain in the Dollar/Yen and reasonable advances againstthe commodity-linked currencies.

The U.S. Dollar continued to mount its strong recoveryagainst the major currencies on Thursday. The Dollar Index rose sharply, ledprimarily by a strong gain in the Dollar/Yen and reasonable advances againstthe commodity-linked currencies.

The weekly Dollar Index chart is in a position to post itsstrongest weekly gain since early May. The current rally was set up when theindex held the .618 retracement level of the entire November to June rally from75.03 to 89.22. Based on the short-term range of 89.22 to 80.17, look for thiscurrent rally to advance to perhaps 84.69 over the near-term.

The U.S. Dollar finished higher versus the Japanese Yenafter Japanese Prime Minister Kan voiced his strong opinion about the recentmovement in the Forex markets.

In what amounts to be a form of “verbal intervention”, Kancalled the recent swings in the currency “rough”, and said they “are a littletoo rapid”. These are the strongest comments from the Japanese government whichusually only says it is concerned about the movement in the currency andexcessive volatility. Some traders believe the strong language used by Kan is a scare tacticwhich only represents an attempt to limit gains in the Yen and in no way shouldbe interpreted as a precursor to an actual intervention.

Some traders rushed out to sell the Yen based on thecomments, but the majority of market participants are said to believe that anintervention is unlikely for mostly logistic reasons. The likelihood of anintervention is small because they seldom work and the size needed to actuallyhave an influence on the market would require the cooperation of the U.S.and other key central bank players.

Some Forex traders also believe that the recent rally in theYen has been orderly and based on sound economic reasons. As long as thecurrency doesn’t swing violently or is influenced by excessive speculation, thechance of the Japanese government garnering support from other nations for anintervention remains remote.

The concerns voiced by Japanese officials are not withoutmerit however. Their primary concern at this time is to protect the economy. Byexpressing strong opinions which may weaken the Yen, the government is doingits best to protect Japan’sexport driven economy.

Another reason why an intervention may not work at this timeis because the desire to buy the Yen is being triggered by safe-haven demandbecause of fear that the global economic recovery may be stalling. Declines inthe Euro Zone and U.S.economies could fuel worries that the world’s economy is headed toward adouble-dip recession. The action by the Fed earlier in the week has contributedto this growing pessimism. If a slowdown is confirmed, then investors may beginto buy the Yen more aggressively.

Technically, the USD JPY slid to a 15-year low on Wednesdaybefore buyers stepped in to trigger a short-covering rally into the close. Thefollow-through rally overnight helped form a minor bottom at 84.73, but failed togarner enough upside momentum to trigger a clean closing price reversal bottom.

The strong rally and subsequent follow-through, however, hasput the Dollar/Yen in a position to post a weekly closing price reversal. Thekey number to watch is last Friday’s close at 85.48. The Dollar/Yen close abovethis number today, but a close over this level on Friday will be a strongindication that this market is gearing up for a 2 to 3 week retracement.

Trading may get volatile overnight and during Friday’s daysession because of the struggle between fundamental and news driven traders whobelieve a move by the Japanese government to weaken the Yen is inevitable.These traders may get support from technical traders who believe that theDollar/Yen is oversold, but trend traders may prevail if demand for riskyassets continues to decline, triggering an extension of the flight-to-qualitybreak.

The importance of this developing weekly closing pricereversal in the Dollar/Yen cannot be overemphasized at this point. This type ofpattern has been known to generate 50% retracements over a 2 to 3 week periodwhich means that a rally to 89.85 is possible over the short-run. Once againkeep the focus on how this market behaves at 85.48 tomorrow. The action at thislevel will dictate how serious traders are about turning this pair around andcould offer clues as to what the Japanese government’s next move is going tobe.

The Greenback closed up against the commodity-linkedcurrencies, extending it winning streak versus the Australian and New ZealandDollars. Fears of a global economic slowdown fueled by this morning’sunexpected rise in unemployment claims, pressured equities which helped curtailinvestor demand for risky assets.

Some of the weakness in the Aussie was triggered last nightafter the Australian unemployment rate unexpectedly rose to 5.3 percent inJuly, compared to the median forecast of 5.1 percent. Further downside actionwas fueled by the U.S. Weekly Initial Claims Report which showed an increase of2,000. This number pegged total claims at 484,000, the highest level sincemid-February.

Technically, the Kiwi and Aussie are slightly oversold onthe short-term charts, but the daily charts indicate further downside action islikely.

The New Zealand Dollar is nearing an uptrending Gann angleat .7048 which could produce a technical bounce, but ultimately downsidemomentum is likely to pressure this market into a 50% level at .6977.

The Australian Dollar broke an uptrending Gann angle thismorning, triggering stops. Look for an acceleration to the downside if the lateJuly swing bottom at .8904 is violated. Although its primary downside target of.8644 is pretty far-off at this time. This pattern should not be taken lightlysince it suggests that a major fundamental development may take place whichdrives this market sharply lower over the near-term. A combination of anuptrending Gann angle and the 50% level of .8644 suggest that this price may betested on August 13th. Bad news from China may be the catalyst whichtriggers a free fall.