USD JPY Giving Back Gains

Technically overbought conditions are helping the USD JPY give back gains following a huge surge to the upside on Friday.

Technically overbought conditions are helping the USD JPY give back gains following a huge surge to the upside on Friday. The Dollar rallied sharply higher after better than expected U.S. jobs data pointed toward the possibility of the Fed raising rates sooner than expected.

The reversal of carry trade positions also helped send the USD JPY to levels not seen since early November. The friendly employment numbers forced traders to buy U.S. Dollars to pay back borrowed funds and short borrowed Japanese Yen. Last week, the Bank of Japan helped put in the top in the Japanese Yen when it announced another stimulus package. The BoJ seems to be leaning toward a less expansionary policy while the Fed readies to tighten. This should help the Dollar gain ground on the Yen.

Technically, the USD JPY is trading inside of a 92.32 to 84.83 range. Last Friday’s rally exceeded the retracement zone of this range at 88.57 to 89.46 before finding resistance at a downtrending Gann angle at 90.51. The overnight action suggests that a pullback to 87.80 – 87.10 is possible. Up trending Gann angle support is at 87.83.

Last week, the U.S. Dollar posted a huge gain versus a basket of major currencies. The strong up move was triggered by a better than expected Non-Farm Payrolls Report which showed a decrease in the unemployment rate from 10.2% to 10%. The pace of job losses also declined and there was a revision to the better in October.

Traders bought the Dollar on the thought the Fed would begin accelerating its process of reducing stimulus measures while gearing up to raise interest rates sooner than previously expected.

Technically, the move in the Dollar appears as a spike on the charts, but it did lay the foundation for a further rally this week by taking out the previous week’s high at 75.66. The weekly chart is the one to watch for the best change in trend indicator. At this time the main trend will turn up when this index crosses the November top at 77.50.

The short-term range is 77.50 to 74.27. The retracement zone of this range at 75.89 to 76.27 is near-term resistance. We’ve seen this move before three times before over the past 6 months. In June the index rallied from 79.12 to 82.34 or 3.22 points. In August the index rallied 77.83 to 79.92 or 2.09. Finally, in October, the index surged from 75.08 to 77.50 or 2.42. This means that the current rally has to exceed 76.36, 76.69 and 77.49 in order to overbalance the previous rallies. Basically, the shorts have to sweat until 77.50 is taken out.

Last week, the EUR USD finished lower. Overnight, the main trend turned down on the daily chart on the break under 1.4801. The break under a retracement zone at 1.4884 to 1.4823 also indicates weakness. The possibility of the Fed raising rates before the European Central Bank is triggering the selling pressure in the Euro. Last week, the ECB voted to leave interest rates unchanged. It also initiated a hawkish stance when it announced it would begin phasing out its stimulus programs. Additional selling pressure hit this market when ECB President Trichet said he wanted to see a stronger Dollar.

The GBP USD is under pressure overnight after closing lower last week. While the Fed. and the ECB are gearing up to begin phasing out stimulus and raising interest rates, the U.K. is still struggling to exit from its recession.

The current daily chart pattern is bearish now that a lower top has been formed at 1.6720. The main range is 1.5706 to 1.6878 with a retracement zone at 1.6292 to 1.6154. This zone is the next likely downside target. Additional support comes in at three main bottoms at 1.6271, 1.6261 and 1.6250. A trade through 1.6271 turns the main trend down. On December 10th, the Bank of England meets to discuss monetary policy. Look for interest rates to remain unchanged while the BoE leaves its asset buyback program intact.

The USD CHF is trading higher overnight. The breakout over the last swing top at 1.0222 turned the main trend up. The sharp break in gold is helping to fuel the rally. While the Fed is thinking about raising rates to stem inflation, the Swiss National Bank is still worried about deflation. This means that an intervention by the SNB is not out of the question. The situation will be clarified when the central bank meets on December 10th.

The Bank of Canada meets this week on the 8th. Look for it to keep interest rates unchanged at 0.25%. It may address last week’s surprise hike in the number of jobs added. This may trigger a short-term rally, but gains are likely to be limited if the BoC expresses concerns about the impact of a higher currency on exports.

Technically, this market is still trading inside of two ranges. The main range is 1.0991 to 1.0205. This creates a range at 1.0598 to 1.0691. The shorter-term range is 1.0205 to 1.0870 with a retracement zone at 1.0537 to 1.0459.

Weak demand for higher yielding currencies should pressure the AUD USD this week
Traders are concerned that a hike in U.S. interest rates will cause the Aussie to lose its appeal as a higher yielding asset. Last week the Reserve Bank of Australia raised its benchmark interest rate 25 basis points to 3.75%, but Governor Stevens hinted the RBA may take a break from further hikes because inflation is in check. This news coupled with the possibility of a Fed hike will shrink the interest rate differential between the two countries. Look for the USD AUD to challenge the main bottom on the weekly chart at .8905.

The main trend is down on the NZD USD weekly chart. The trend turned down two weeks ago when this pair broke .7081. A new lower top has been formed at .7523. At its next meeting on December 9th, the Reserve Bank of New Zealand is expected to hold interest rates at 2.50 percent. It may also adopt a dovish stance as it addresses a deteriorating labor market while reiterating its stance to hold rates down until the 3rd quarter 2010. The charts indicate that there is plenty of room to the downside with .6560 a possibility by the week-ending December 25th.