Japanese Yen Traders Chose Safety over Intervention

Risk aversion helped strengthen the Japanese Yen despite thenews that Japan’sgross domestic product slowed during the second quarter.

Risk aversion helped strengthen the Japanese Yen despite thenews that Japan’sgross domestic product slowed during the second quarter.

The weakness in the USD JPY also meant that last week’sweekly closing price reversal bottom was not confirmed. This means that tradersare once again favoring safety over the possibility of an intervention by theJapanese government and the Bank of Japan.

Traders now believe that an intervention will not beeffective without the cooperation of other central banks which seems remote atthis time since many are dealing with too many problems of their own withouthaving to worry about Japan.

Traders shrugged off stories of heightened sensitivity inEuro Zone bond markets and drove down the Dollar.

Early in the session the Euro was down on reports that thepremium investors pay to hold 10-year Irish and Greek government bonds ratherthan German Bunds were rising. In addition the cost of insuring their debtagainst default also increased. The Euro was under pressure early in thesession on this news, but by mid-session had turned around to the positiveside. The market was able to hold these gains into the close.

Contributing to the turnaround in the Euro were three lacklusterU.S.economic reports. This morning’s NY Fed Empire State Manufacturing Index didn’thelp the outlook for the economy. The report actually gave off mixed signalssince it showed that manufacturing is still expanding, but at a slower pace.

The EUR USD also received support from a surprise decline inthe NAHB-Housing Market Index. The report showed the index declined to 13 from14 the month prior. Traders were pricing in an increase to 15.

Technically the Euro posted a daily closing price reversal bottom.Based on the current short-term range of 1.3334 to 1.2732, traders should watchfor the start of a 2 to 3 day rally with 50% of this range the next objectiveat 1.3033. A breakout through 1.2807 is needed to confirm the pattern.

All three commodity-linked currencies showed a littlestrength on Monday with the Australian and New Zealand Dollar posting closingprice reversal bottoms.

The Australian Dollar could be starting a retracement rallyto .9039. The New Zealand Dollar retracement target is .7175. Short-termoversold conditions and the return of demand for risk are the primary driversbehind this morning’s developing reversal bottom. Like the Euro, these twocurrency pairs are not outright buys until confirmed. Otherwise the markets mayjust drift lower. The Australian Dollar’s reversal will be confirmed after arally through .8993, the Kiwi, after a breakout through .7102.

Continue to look for the possibility of extreme volatility.The threat of a Japanese intervention will still linger until governmentofficials put it to death. In addition, concerns about sovereign debt ofperipheral Euro Zone members have begun rising again. At a minimum this shouldlimit gains in the Euro, but could lead to fresh selling pressure.