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Japan Steps in and Resurrects Beaten Down US Dollar

Japan Steps in and Resurrects Beaten Down US Dollar

2011-10-31 06:06:00
Joel Kruger, Technical Strategist
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  • Japan intervenes after fresh record Yen high
  • Yen lower on the day by well over 4% to end tight multi-week trade
  • US Dollar rallies sharply across the board as a result
  • Lack of safe haven options should open the door for more USD strength
  • Core USD bullish outlook still very much intact
  • Short Aud/Usd trade survives after stops narrowly averted

We are definitely relieved and pleased to see this type of price action early Monday after having our core bullish US Dollar outlook tested in recent weeks. While we are far from out of the woods at this point, we contend that the US Dollar has finally put in the next key higher low ahead of a bullish resumption which eventually should result in a clearance of its early October highs against most currencies. The FXCM US Dollar Index is on fire early Monday, with the market racing from multi-day lows by 9,450 back into the 9,700 area thus far.

The catalyst for the move on Monday has unquestionably come from an aggressive Japanese intervention, with Usd/Jpy rallying by well over 4% thus far on the day after earlier breaking to fresh record lows just shy of 75.50. The move is significant and ends a multi-week bout of consolidation that had predominantly been confined to the 76.00’s. From here, we would now expect to see the formation of a legitimate top in the Yen across the board (Us/Jpy bottom), with this market seen under pressure going forward, even in risk off market environments.

What is even more interesting to us is what impact this type of move will have on the US Dollar going forward? We believe that the elimination of the Yen as a viable safe-haven option following this latest intervention will now result in only one currency being able to benefit from any risk off flows in the markets going forward. The Swiss Franc was knocked out of the picture several weeks back when the SNB stepped in and declared that they would not allow their currency to continue to appreciate, and now Japan is doing the same with the Yen. The US Dollar is therefore the only traditional safe haven currency left to trade into in risk off market environments and as such, we see the buck in a position to benefit greatly over the coming months while the global economy continues to try and sort itself out.

On Friday, we cited technical evidence that continued to support our core USD bullish outlook, with the Euro still looking quite bearish on the monthly chart and unable to clear the September highs despite a massive rally in October. At the same time, our convictions were seriously tested, and the market stalled just shy of those critical highs to barely keep our outlook intact. We used the broad USD sell-off to establish a major short position in Aud/Usd, and here too, our strategy was dangerously compromised after stops were narrowly averted in the previous week. Still, the market managed to stall out ahead of the September highs and did not close above our 1.0750 stop level, ahead of this latest major short-term reversal on Monday which has taken us back into the money below our 1.0550 short entry. From here, we look for continued declines back below parity over the coming days.

ECONOMIC CALENDAR

Opening_Comment_body_Picture_5.png, Japan Steps in and Resurrects Beaten Down US Dollar

TECHNICAL OUTLOOK

Opening_Comment_body_eur10.png, Japan Steps in and Resurrects Beaten Down US Dollar

EUR/USD: It has been very difficult to retain a bullish USD outlook in the short-term, with the Euro rallying so aggressively in the month of October. However, we continue to take our cues from the longer-term monthly chart which shows a different picture and significantly mitigates the USD beating on the daily chart. The monthly chart shows the market in a downtrend off of the record highs from 2008 and in the process of carving the next lower top ahead of a move back towards the 1.2000 area. Despite the latest surge in October, the price is still holding below September’s high and we look for gains to stall out somewhere ahead of 1.4390 in favor of a bearish resumption. Ultimately, only back above 1.4390 would delay and give reason for concern. Monday’s price action is definitely helping to confirm outlook.

Opening_Comment_body_jpy2.png, Japan Steps in and Resurrects Beaten Down US Dollar

USD/JPY:Monday’s surge has resulted in an end to a very tight multi-week trade largely confined to the 76.00’s and a likely shift in the overall construct, with the pair carving out a major bottom by 75.50. The price has now broken back above the daily Ichimoku cloud for the first time in several months to confirm a potential shift in the trend, and we will look for a close above the cloud on Monday (78.00) to officially confirm bias. Next key topside resistance comes in by 80.25 and a break above this level will likely accelerate gains and expose the 82.00-85.00 area further up.

Opening_Comment_body_gbp2.png, Japan Steps in and Resurrects Beaten Down US Dollar

GBP/USD: The market has finally reached the major double bottom objective just over 1.6100 that was triggered on the break of neckline resistance at 1.5715 back on October 12. From here, scope is for a resumption of what we believe to be a broader downtrend and we expect the 200-Day SMA, which coincides with the double bottom objective, to cap gains on a daily close basis ahead of the next major downside extension. Look for a break and close back below 1.5950 to confirm and accelerate, while only a close above the 200-Day SMA negates. Monday’s price action encourages outlook.

Opening_Comment_body_swiss1.png, Japan Steps in and Resurrects Beaten Down US Dollar

USD/CHF: The market has been in the process of a major correction since peaking out at 0.9315 on October 6. However, the overall outlook remains constructive, with the pair looking like it is in the process of carving a major base ahead of some significant upside over the coming weeks and months. Look for the latest round of setbacks to be well supported in the 0.8500’s, where a fresh medium-term higher low is sought out ahead of a bullish resumption back towards and eventually through 0.9315. Ultimately, only a weekly close below 0.8500 would concern.

--- Written by Joel Kruger, Technical Currency Strategist

To contact Joel Kruger, email jskruger@dailyfx.com. Follow me on Twitter @JoelKruger

To be added to Joel Kruger’s distribution list, send an email with subject line “Distribution List” to jskruger@dailyfx.com

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