Dollar/Yen Posts Weekly Reversal Bottom; Is Intervention Imminent?

The U.S. Dollar finished the week sharply higher afterposting gains against all the major currencies. The catalyst behind this week’sstrength was the action by the Fed to stabilize its balance sheet by shiftingassets from mortgages to long-term debt. This sent a signal to already worriedinvestors that the Fed was making room for the possibility of a prolongeddownturn in the U.S.economy. Investors sought safety in the Greenback on concerns that the slowdownin the U.S.economy may soon trigger a halt in the global economic recovery.

The U.S. Dollar finished the week sharply higher afterposting gains against all the major currencies. The catalyst behind this week’sstrength was the action by the Fed to stabilize its balance sheet by shiftingassets from mortgages to long-term debt. This sent a signal to already worriedinvestors that the Fed was making room for the possibility of a prolongeddownturn in the U.S.economy. Investors sought safety in the Greenback on concerns that the slowdownin the U.S.economy may soon trigger a halt in the global economic recovery.

As pessimism soared regarding the outlook for the strengthin the global economy, investors moved funds into the Japanese Yen in thetypical flight-to-quality fashion, but a few comments from the Japanesegovernment, much stronger than the usual “verbal intervention” rhetoric, causedinvestors to scramble out of the Yen as the threat of an actual interventionbegan to be taken more seriously. After reaching a 15-year low earlier in theweek, the Dollar/Yen rallied as the fear of an intervention trumped the desirefor safety.

The USD JPY finished higher and in the process posted aweekly closing price reversal bottom. This formation, once confirmed by a follow-throughrally next week, often leads to the start of a 2 to 3 week retracement to amajor 50% level, currently identified as 89.55.

Friday’s rally in the Dollar/Yen helped form a new mainbottom on the daily chart at 84.73. Based on the short-term range of 88.11 to84.73, traders should watch for minor resistance at a retracement zone at 86.42to 86.82. Once this area is overcome onthe short-term charts, the market is likely to accelerate to the upside. Ifmomentum dies out on Monday, it is likely to be in this zone, so this is a keyarea to overcome in order to sustain the developing rally.

The current two-day rally in the USD JPY has most likelybeen a reaction to the “verbal intervention” by the Japanese government earlierthis week. Some traders feel the government will intervene at this time, butdoubts still linger about its effectiveness.

According to the Bank of Japan minutes from the July 14-15meeting published overnight, the BoJ is closely monitoring the effect of astrong Yen and falling stock prices on the economy. If one interprets this to mean that the BoJis seriously considering an intervention at this time, then this news will actas the catalyst to drive the Dollar/Yen sharply higher.

Throughout the entire financial crisis the Dollar and theYen have both benefitted from investors’ unwillingness to hold on to riskyassets. Most of the rally in the Yen has been traders seeking shelter insafe-haven assets. The possibility of a rally in the Dollar/Yen exists at thistime because speculators feel the Japanese government will intervene in orderto protect the interest of its exporters. One key to this rally taking placewill be whether a stock market break will trigger a flight-to-safety rally,thereby limiting gains in the Yen following an intervention. In other words, ifequities break hard, will the news of an intervention be enough to counter-actthe demand for the lower risk Japanese Yen. If not, then the Yen seems destinedto move higher.

The EUR USD closed sharply lower for the week. This currencypair accelerated to the downside following a change in trend earlier in theweek when the market crossed a swing bottom at 1.3119. Downside momentum isbuilding which could drive the Euro into a major retracement zone at 1.2605 to 1.2433.

Although recent economic data has suggested a developingrecovery in the Euro Zone economy, some traders feel that this is backwardthinking since the reports are based on stale data. Going forward, investorsremain skeptical about future growth especially if a slowdown in the U.S. economyspreads globally.

The British Pound finished the week lower after findingresistance at a .618 retracement level at 1.5967. Once the rally stalled andbuyers became scarce, the trend easily turned down on the daily chart when aswing bottom was crossed at 1.5819.

The downside move accelerated earlier in the week after theBank of England lowered its outlook for growth. This added to the concerns thatthe implementation of new austerity measures and higher taxes will tie up theeconomy and possibly trigger a double-dip recession. Further adding to theweakness was a report that U.K.home prices fell for the first time since July 2009, indicating that there ismore supply than demand. Tight credit and employment worries have kept manypotential British homebuyers on the sidelines.

The strong rally in the Dollar was the story this week, butnext week, the focus will shift to the Japanese Yen. Shorts are nervous aboutwhether the Japanese government will intervene and may begin to panic as thegovernment debates what to do about the high priced Yen. The longer thegovernment takes to make a decision, the higher the Dollar/Yen may rally,before moving sharply depending on what the decision turns out to be. Either wayone looks at it, the Yen is set up for a volatile week.

Even if the Japanese government intervenes, many investorsfeel that hedge funds and institutions will treat this as a buying opportunityfollowing a sell-off. Some traders feel that no matter what the governmenttries to do, a weakening global economy will eventually overcome the benefitsof an intervention. This is the primary reason why Japanese officials aretaking their time before taking action. It doesn’t make sense to flood themarket with Yen if it is only going to be used to set up more sellingopportunities.

The huge rally in the Dollar Index, following a test of aFibonacci retracement level at 80.45, could continue next week if the Greenbackis treated as a safe-haven currency. The charts indicate that this market couldrally to 84.69 before finding any solid selling pressure.

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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