Aussie and Japanese Yen to be Main Focus Next Week

The Australian Dollar and the Japanese Yen are likely to bethe main focus next week as both are expected to be big movers if the globalequity markets expand to the upside as expected.

The Australian Dollar and the Japanese Yen are likely to bethe main focus next week as both are expected to be big movers if the globalequity markets expand to the upside as expected.

Money continued to flow out of T-Bonds and Gold which may bean indication that investors are gearing up for a stock market rally next week.

Investors should be focusing on the movement of cash at thistime. The money leaving the Treasury and Gold markets has to be put to work atsome time and the stock market seems to be the most likely place to invest. TheAustralian Dollar could see more upside as traders are likely to chase higheryielding assets. The Japanese Yen could feel pressure from a renewal of thecarry trade if equity markets begin to soar.

The AUD USD traded higher on Friday but under yesterday’shigh at .9276 in reaction to Chinese trade data released overnight that showed China’strade surplus narrowed as imports accelerated in August.

We already knew that Chinahas surpassed Japan and the U.S. to become Australia’s trading partner, butthis report could be laying the foundation for an even sharper rise in theAussie if the global economy begins to heat up. At this time, the AustralianDollar seems to be well positioned to gain from greater demand for higher riskassets.

Technically, the AUD USD is in an uptrend after crossing thelast swing top at .9221 on Thursday. This price level is likely to become newsupport since often old tops become new bottoms. In addition, an uptrendingGann angle at .9274 on Monday is helping to guide this currency pair higher.

The pace of the current rally may begin to slow down as thismarket approaches a series of tops at .9323, .9337, .9364 and .9387. Once thisarea is cleared, we could begin to see an acceleration to the upside. The bignumber to overtake will be the November 2009 top at .9405. If this price getstaken out, then look for renewed talk of the Australian Dollar reaching parwith the U.S. Dollar.

The USD JPY closed up on Friday, but was still lower for theweek. Today’s action confirmed Wednesday’s closing price reversal bottom, butall this indicates is the possibility of a short-covering rally back to 84.62to 84.93. What I really wanted to see was a close over last week’s settlementat 84.28.

This morning, the Dollar/Yen regained 84.28 for ashort-period of time, trading up to 84.37 before buying dried up. Thisindicates that the rally was most likely short-covering rather than fresh longsbecause of the way the market drifted lower throughout the rest of the day andinto the close.

Stronger demand for higher risk assets as well as the threatof an intervention by the Japanese government and the Bank of Japan was thecatalyst behind this week’s bottoming action.

The daily reversal bottom pattern usually lasts 2 to 3 daysand ends inside of a short-term retracement zone, but they have been known tostart even larger rallies. This is possible with the current set-up. Money hasbeen shifting out of Gold and T-Bonds and big investors may be gearing up toinvest these funds in the equity markets.

If this occurs, then look for a revival in the carry trade.This occurs when investors, sensing the start of an increase in appetite forrisk, borrow in Japan,convert the Yen to Dollars and buy riskier assets.

The set-up is there, the market just needs some musclebehind it to follow-through. This may occur next week when many large tradersand institutions are expected to return to the trading arena after the Jewishholiday and the extended end-of-summer vacations.

Don’t be surprised by an intervention in the Japanese Yenover the week-end. This could be the catalyst which drives up demand for riskyassets next week.