Japanese Yen Traders Don’t Seem to Know if Risk is on or Risk is Off

The USD JPY traded sharply higher Fridaymorning, but the strong gains faded after a report showed the U.S. ServicesSector slowed during August.

The USD JPY traded sharply higher Friday morning, but thestrong gains faded after a report showed the U.S. Services Sector slowed duringAugust. The rise in demand for stocks appeared to be reviving the carry tradeearlier in the session. This is a situation where investors borrow the loweryielding Yen then sell it to invest in higher yielding assets. Friday’s tradingaction in the Japanese Yen suggests that traders can’t make up their minds asto whether risk is on or risk is off.

The Japanese Yen began to strengthen against the Dollarafter the weak U.S. ISM Services index indicated slower growth. The Dollar/Yenpared its gains while some traders took defensive positions against the possibilityof a weaker U.S.economy.

The chart pattern suggests a possible double-bottomformation. This pattern will be confirmed if 85.90 is broken and at the sametime will signal a change in trend to up.

Friday’s better than expected U.S. Non-Farm Payrolls dataput risk back on the table. Although this report showed that the economy wasstill shedding jobs, private sector hiring was above the consensus, drivinginvestors into equities and out of gold and Treasuries.

The shift in risk sentiment drove the U.S. Dollar lowerespecially against the commodity-linked currencies. The Japanese Yen was alsopunished as traders left the safety of the lower yielding currency.

Upside momentum was building in the Australian Dollar,putting it in a position to test the early August top at .9221. Recent Aussieeconomic data also led to speculation that the Reserve Bank of Australiawould raise interest rates at its next meeting on September 7.

The strong rise in the Euro is a sign that investors arebecoming confident that European economies may be emerging slightly ahead ofthe U.S. economy, carried bygreat economic numbers from Germany.

Earlier in the week, the European Central Bank left interestrates unchanged, but post report comments from ECB President Jean ClaudeTrichet provided some support for the single currency when he announced thatthe central bank would continue to provide a range of emergency funding tocommercial banks through the end of 2010. He also downplayed the strength ofthe economic numbers which he tends to do each time the Euro Zone economyappears to be turning the corner.

Thin trading conditions may have contributed to the sharpbreak in the Dollar this week, so we are likely to find out next week whereinvestors stand on the Greenback. Although the U.S. employment data was slightlybetter than expected, the country did lose jobs for the month. Some feel thatthis report took some of the pressure off the Fed to implement additionalquantitative easing, but others remain concerned about the slow down in theeconomy because of today’s weaker ISM services data.

If T-Bonds continue to break and equities rise, then thiswill be a sign that trader appetite for risk is back on. This will lead to morepressure on the Dollar. The tricky market will be the Dollar/Yen. The revivalof the carry-trade will pressure the Yen, but further weakening in the U.S.economy may encourage traders to dump the Dollar in favor of the Yen. If thisoccurs, then look for renewed talk about Japanese government and Bank of Japanintervention. The Yen by far will be the most difficult market to assess overthe short-run and should be avoided until the catalyst driving this market canbe identified with clarity and conviction.