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USD/JPY Channel Waits for Return of Risk Appetite

USD/JPY Channel Waits for Return of Risk Appetite

2010-05-21 17:39:00
John Rivera, Currency Analyst
Share:

 05-21-10RT-01

How Stable is the USD/JPY Range?

Levels to Watch:
-Range Top: 95.50 (Trend, Pivot)
-Range Bottom: 89.50 (Trend, Pivot)

• The yen has started to give back some of its gains generated from a massive flight to safety as fears ease over the potential impact of the European debt crisis. The USD/JPY has become a proxy for broader risk sentiment and if markets take the view that the recent panic was a bit overdone, then a significant retracement may be expected.

• The USD/JPY has been in an ascending channel since its spike low to 84.81 on 11/27/0. The recent rise from trend lien support increases the validity of the formation and opens the door for a test of the upper bound.

Suggested Strategy
• Long: Place an entry at 91.25 to confirm reversal and above the 200-Day SMA.
• Stop: Set the stop to 89.75
• Target: The first target is the 20-Day SMA at 92.75 followed by 93.98 - 5/6 high.

Trading Tip – Given the level of the panic that dragged the USD/JPY lower, a retracement could be just as violent. Therefore, accelerated gains near our target level could be viewed as an opportunity to get long. However, if the move is missed wait for a retracement before getting long as there is considerable upside potential if the channel formation continues to develop. Traders that are more risk averse may want to wait for a move above 92.00 as the level has provided resistance and support during this year. We could also look to equity markets to take our cue and the Dow remaining above 10,000 will be a prerequisite for a bullish position. A move below the monumental psychological could trigger further losses for the blue chip index.

Event Risk for Japan & U.S.

Japan –The BOJ also announced a loan scheme targeting growth industries and suggested it could be willing to do more to support economic recovery by accepting a broader range of collateral for BOJ operations. The measure isn’t expected to cure the country’s deflation problem which will have to come from domestic growth. The central bank raised their outlook for the economy as they are seeing a sustained recovery in domestic demand. The central bank also cautioned that yen rises needed to be monitored which could raise the speculation of intervention which may have more if an impact than any fundamental releases.  

U.S. The economic calendar is expected to point toward a sustaining U.S. economic recovery with home sales, consumer confidence and Durable goods orders. If the housing market continues to show signs of stabilizing post tax credit, then we could see the outlook for growth and interest rates rise. Economists are forecasting a 1.5% increase in durable goods orders, another sign of continued growth. However, unless we see improvement in the labor market the FOMC is expected to remain on hold which may lead to markets overlooking this week’s release in anticipation for the NFP report.

05-21-10RT-02

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