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Japanese Yen Rally at Risk- Intervention Watch Is On. . .

By , Currency Strategist
11 November 2011 23:24 GMT
Japanese_Yen_Rally_at_Risk-_Intervention_Watch_Is_On._._._body_Picture_5.png, Japanese Yen Rally at Risk- Intervention Watch Is On. . .Japanese_Yen_Rally_at_Risk-_Intervention_Watch_Is_On._._._body_Picture_6.png, Japanese Yen Rally at Risk- Intervention Watch Is On. . .

Fundamental Forecast for Japanese Yen: Neutral

The Japanese yen advanced more than 1.40% this week as traders continue to fade the October 31st rally sparked by an intervention from the Japanese Finance Ministry. Throughout the course of the week officials have continued to up their rhetoric with regards to the over-valuation and rapid appreciation of the yen with the NIKKEI citing speculation that officials may have been secretly intervening in currency markets. Japanese Prime Minister Jun Azumi declined to comment on possible covert interventions but did note that officials will continue to closely eye speculative moves in the currency markets. Prime Minister Yoshihiko Noda has also already explicitly expressed willingness to act “against excessive currency fluctuations” as trades continue to test the resolve of officials.

Helping support the yen’s advance today was the opening of two new USD liquidity lines with the Bank of Japan which was disclosed today from the New York Fed. The opening of new FX swaplines for the first time in months with the BoJ is likely to have contributed to the yen’s rally as transfers of dollars into yen weighed on the USD/JPY pair. However traders remain poised for a possible intervention with expectations for

The Japanese economic docket next week is highlighted by the preliminary 3Q GDP and industrial production data on Sunday night and the BoJ rate decision. Consensus estimates call for an annualized GDP print of 5.9%, a dramatic contrast from the previous read of -2.1%. Later in the week investors will be closely eyeing the Bank of Japan interest rate decision and while there are no expectations for the central bank to move on rates, officials may see scope to increase the size of their asset purchases as deflationary concerns continue to dictate policy. In the week ahead expect intervention rhetoric to increase as the yen continues drift lower with traders anticipating officials to address the recent run-up in the yen.

The USD/JPY closed the week just above the 61.8% Fibonacci retracement taken from the intervention advance at the 77-figure. A break here sees an increased risk of intervention with subsequent floors seen at 76.8%, the 23.6% retracement at 76.50 and the 76-figure. Topside resistance now holds at the 50% retracement at 77.50 backed by 77.80 and the 38.2% extension at the 78-handle. Should Japan intervene, look for profit targets at the rally highs around 79.40-50. -MB

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11 November 2011 23:24 GMT