Risk Trade Back On; USD JPY Set Up for Rally

The USD JPY got a boost today because of the strong rally inthe U.S.equity markets. A combination of friendly events fueled today’s rally whichbegan overnight after European and Asian traders set out to satisfy theirappetites for risk by supporting equities.

The USD JPY got a boost today because of the strong rally inthe U.S.equity markets. A combination of friendly events fueled today’s rally whichbegan overnight after European and Asian traders set out to satisfy theirappetites for risk by supporting equities.

News that Potash Corp. rejected a buyout from BHP BillitonLtd helped drive agricultural companies higher on the thought that othercompanies may be in BHP’s radar now that the original deal fell through. Areport showing that retail giant Wal-Mart Stores, Inc. beat earnings estimatesalso helped drive investors into equities. The news regarding Wal-Mart was asign of strong consumer spending in the wake of a dismal outlook for theeconomy.

At least for the time being, investor appetite for riskseems to be stronger than the desire for safety. Today’s rally was tipped offon Monday when all three major futures indices posted daily closing pricereversal bottoms.

The charts suggest the USD JPY is trying to form a secondaryhigher bottom. The ability to regain the retracement zone at 85.55 to 85.36 isa strong sign that the Dollar/Yen may make another attempt later in the week toconfirm last week’s weekly closing price reversal bottom.

Although the possibility of an intervention by the Bank ofJapan and the Japanese government seems to be remote, a strong rally in theequity markets could trigger renewed interest in the carry trade especially ifcoupled with better than expected U.S. economic data.

The chart pattern says the Dollar/Yen is set up for a rally.It is now up to investors to show up to support the move. Without buyingvolume, this pattern could fade away like several have over the past fewmonths.

The GBP USD is trying to establish support on a minor 50%price level at 1.5635. Breaking this level could trigger an acceleration to1.5470. Needless to say, the Sterlingis at a critical point on the short-term chart. In addition, there is anuptrending Gann angle at 1.5546. This angle has helped support the rally sinceMay. Watch for a technical bounce up if this angle is tested.

Fundamentally, the British Pound took a jolt early thismorning when it was reported that July inflation was lower than expected. Thisweakness pressured the Sterlingall day. A drop in U.K.inflation is a sign that the economy is slowing. This is a concern because itcould indicate the possibility of a double-dip recession, plus it comes at atime when the government is reading to apply new austerity measures and highertaxes.

The drop in the inflation rate from 3.2% to 3.1% was thethird consecutive month that prices have risen more slowly. The surprise natureof this slow down highlights the difficulty the Bank of England is having inpredicting how fast and far it will fall.

The BoE would like to see inflation drop to at least 2%. Atthis time, prices for energy, clothing and furniture are easing, but the costof food saw its biggest monthly rise in two years. The difference in these twoinflation rates partially demonstrates the power of consumer spending. It seemsthe consumer has a little more control on his spending for energy and otherdiscretionary consumer goods but is not willing to cutback on his spending fornecessities such as food.

Another concern for the BoE at this time is that wages arenot keeping pace with overall inflation. This is another factor that could leadto a slow down in consumer spending. With housing prices already falling, theBoE does not want to deal with a serious drop off in consumer spending.

The primary reason for the sell-off in the British Poundtoday was most likely this growing concern because it means the BoE will haveto begin another round of currency-weakening stimulus.

Tuesday’s action suggests that the risk trade is back on butthat traders are willing to cherry-pick which currencies are strong and whichare weak depending on the economic outlook. This scenario may producevolatility in the marketplace especially for traders who get caught up in thebroad fundamentals and fail to pay attention to the details. This is one reasonwhy following only the trade-weighted Dollar Index can get you in trouble.

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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