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USD/JPY Range Contingent On Return Of Risk Appetite  02-25

USD/JPY Range Contingent On Return Of Risk Appetite 02-25

2010-02-25 19:49:00
John Rivera, Currency Analyst
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usdjpy0225

Levels to Watch:
-Range Top:       92.00 (Pivot, Range)
-Range Bottom: 1.7300 (Pivot, Range, Trend)
 
A flight to safety inspired by the prospect of another Greek credit rating downgrade has spark a broad based flight to safety. The yen has been the main beneficiary from the widespread panic. Greenback support has also been prevalent as it continues be a destination for safe haven flows. A return of risk appetite or a heightened level of panic could spark a desired reversal. 
 
The pair has failed to close below the 89.00 price level since 12/14/2009 making it formidable support. Converging trend line support (12/9,2/4 lows) could serve as reinforcement, increasing the chances of a reversal. The 2/4 low of 88.54 could also serve as support and limit downside risks. 
 
Suggested Strategy
 
 
Long: Place an entry at 89.25 to confirm a reversal in sentiment 
Stop: Set the stop to 88.50 just below possible support at the 2/4 low
Target: The first target is 90.33-retracement of current bearish move, followed by 91.00
 
 
 
Trading Tip – The dominate risk aversion theme has re-emerged as credit troubles in Greece continues to generate an environment of uncertainty. In of itself the Greek economy accounts for a small portion of the Euro-area economy but concerns that its troubles could be the tip of the iceberg is what has traders on edge. A concrete bailout package is all that would be needed to see a reversal of today’s losses putting us in a profitable trade. A second scenario is that fears grow to a level where the dollar becomes the sole target for safe haven flows, as seen following the Lehman collapse. Although the latter is less probable, it can’t be discounted given the fragility of the global recovery. The man source of dollar strength could come from a rise in U.S. interest rates. The Fed raised the discount rate last week and has taken every opportunity to lower expectations for a rate hike. Regardless, the path has been set and it may be a matter of time before the central bank begins tightening (unless we see the aforementioned scenario of another global downturn).
 
Event Risk for United States and Japan
 
United States – The second reading of 4Q GDP, Chicago PMI and existing home sales will start a period of major event risk. Growth in the U.S. is expected to have accelerated by 5.7% in the final three month period of 2009 led by continued strength in manufacturing. Therefore, the Chicago PMI reading could potentially impact markets if it shows that the sector is slowing-fueling concerns that growth will stagnate. Meanwhile existing home sales are forecasted slightly improve by 0.9%, a disappointing result following the sharp drop in new home purchases could be a sign that the demand is slowing despite the extension of the tax credit. The ISM manufacturing kicks of next week’s calendar which includes the Non-Farm payroll report.  Market participants will examine the employment component for any clues on hiring trends. 
 
Japan – The fundamental calendar generally has little impact on Yen price action but the consumer price report is a release that deserves watching. Policy makers are forecasting deflation will reign for the next three years and economists are expecting that prices fell 1.4% from a year ago in January.  Any sign that prices are decelerating at a faster pace could lead to the yen losing its status as a funding currency. Industrial production, retail trade and employment data are due for release and all key measurements of the economy. Weakness is expected in all three which could maintain the current outlook for slower growth and declining prices. 
2table 
 

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