Short-term USD JPY May Be Overbought

The Japanese Yen weakened for a second sessionagainst all of the major currencies in a move that many traders suspect isrenewed selling pressure from the Group of Seven nations.

The Japanese Yen weakened for asecond session against all of the major currencies in a move that many traderssuspect is renewed selling pressure from the Group of Seven nations. Following adownward spike on Thursday to 76.37, the G-7 was asked to intervene in aneffort to curb the Yen’s appreciation and help support the devastated Japaneseeconomy. Some traders feel the Yen at 80.00 is probably the line in the sandthat the Bankof Japan prefers. This level is roughly the price the market stopped at inNovember when it bottomed at 80.24.

Since the 9.0 earthquake, thetsunami and nuclear reactor problems over seven days ago, the Japanese currencyhad rallied sharply higher amid speculation investors were repatriating assetsto fund an estimated 10 trillion ($123.6 billion) for reconstruction. Sincelate last week, following a special request from the Bank of Japan, the G-7 hasinitiated a very successful coordinated intervention. The real challenge iswhether it can continue to counter the wave of Yen expected to be repatriated.Officially, the G-7 promised to “provide any cooperation” with Japan.

Despite the promise to pressure theYen, technical factors are indicating possible overbought conditions in the USDJPY. Although the outlook for the U.S. Dollar/Japanese Yen is higher because ofthe expected additional intervention pressure, there may be a relief breakbrewing which may trigger a sharp retracement to the downside before freshbuying pressure hits the market.

Technically, the USD JPY isoperating inside of two major ranges. On the daily chart, the key range is 83.29to 76.37. This range creates a retracement zone at 79.83 to 80.65. Overnight, buyersovershot the upper end of the range.

On the weekly chart, 83.97 to 76.37is the key range. This creates a retracement zone at 80.17 to 81.07. Should buyingpressure continue to strengthen the USD JPY then a downtrending Gann angle at 82.76may be the next upside target.

The “what-if” question that manytraders may be asking is: what if the U.S. Dollar/Japanese Yen is overbought attoday’s high at 81.98? Will it be allowed to retrace the entire rally from 76.37?In this case it will mean a retracement to at least 79.18. A break back to thisprice doesn’t seem too unreasonable considering the Bank of Japan target isprobably 80.00 as mentioned earlier.

Although the G-7 is committed toselling as much Yen as possible to get the job done, one has to question howmuch the nations are willing to sell in the hole. Once traders sense thedownside pressure is subsiding, it is highly likely to trigger a short-coveringrally until the next round of selling pressure begins.

I don’t think the mission of the G-7is to pound the Yen as low as it wants. I firmly believe the objective istwo-fold. The first objective has been met with the USD JPY drive up to 80.00.The second will be to maintain order and stability in the market.

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