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Yen Selling Supported by Sentiment and BoJ but Technicals Hint at a Reversal

Yen Selling Supported by Sentiment and BoJ but Technicals Hint at a Reversal

2010-03-17 18:27:00
John Kicklighter, Chief Currency Strategist
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It seems all fundamental signs are supporting the continued selling of the Japanese yen. First and foremost, a number of the highly-regarded benchmarks for risk appetite are forging higher - most notably the Dow put in for a 17-month high in today's spike higher. What's more, the Bank of Japan further diminished its currency's appeal for return by doubling the lending facility that it initially established back in December. With a 20 trillion yen program to support an expansive monetary policy, there is little doubt that it will maintain its top funding status for some time to come. However, there is another interpretation of this data. From the policy decision, this move by the central bank helps to clear an impasse between government and policy authority in working towards a mutual effort to pull the economy out of deflation and right the financial ship. More critical to this sceario is the outlook for risk appetite. While growth-related markets continued their advance today, there remains a critical lack of momentum to support the revival of a stable bull phase. If this lack of conviction precedes an eventual reversal; the yen crosses will certainly respond in kind.

For positioning, I see a few opportunities for new positions; but I will limit my exposure and keep to my existing positions. As it stands, I have offsetting yen exposure. The long USDJPY position I established for a long-term fundamental view is still restrained to congestion; but the imbalance in interest rate forecasts and the the dollar's shedding of its funding currency status will eventually encourage an extended period of appreciation for the pair. In the meantime, there seems a good possiblity of a temporary break of neart-term support at 90 which could set this pair back for a time. Therefore, I have trailed my stop to maintain some profit; and I will reenter should it indeed pull back. My more recent setup, EURJPY, tested 125 resistance this morning once again; but this would end up a successful hold and reversal. With an entry set close to support and stop above it, a first target of 123.25 does not look unreasonable.

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