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USD Rally Overbought, Yen Strength Heightens Risk Of BoJ Intervention

USD Rally Overbought, Yen Strength Heightens Risk Of BoJ Intervention

2011-10-03 15:53:00
David Song, Currency Strategist
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DJ FXCM Dollar Index

Index

Last

High

Low

Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index

10040.25

10055.07

9997.68

0.46

64.14%

USD_Rally_Overbought_Yen_Strength_Heightens_Risk_Of_BoJ_Intervention_body_ScreenShot017.png, USD Rally Overbought, Yen Strength Heightens Risk Of BoJ Intervention

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is 0.46% higher on the day after moving 64% of its average true range, and the greenback may continue to recoup the losses from earlier this year as it maintains the upward trend carried over from the previous month. As the shift in risk-taking behavior props up the reserve currency, the gauge looks poised to make a run at the 78.6% Fibonacci retracement around 10,117, and the bullish sentiment underlying the USD may gather pace in the days ahead as the uncertainties surrounding the global economy bears down on investor confidence. However, we may see a near-term correction unfold over the next 24-hours of tradingas the 30-minute relative strength index falls back from overbought territory, and the index may work its way back towards 9,900 as it appears to have carved an intraday top ahead of 10,050.

USD_Rally_Overbought_Yen_Strength_Heightens_Risk_Of_BoJ_Intervention_body_ScreenShot018.png, USD Rally Overbought, Yen Strength Heightens Risk Of BoJ Intervention

The rally in the U.S. Dollar index should gather pace this week as market participants continue to scale back their appetite for risk, and we may see a test of the 78.6% Fib (10,117) as the daily RSI pushes back into overbought territory. As the oscillator trends higher, we should see the USD continue to gain ground until the gauge falls back below 70, but we may see volatility thin ahead of the U.S. Non-Farm Payrolls report on tap for Friday as the data is expected to show a protracted recovery in the labor market. As the fundamental outlook for the world’s largest economy remains weak, speculation for another round of quantitative easing is likely to resurface, and the central bank may keep the door open to expand monetary policy further in an effort to balance the risks for the region. In turn, we may see a near-term consolidation play out before the dollar continues to trend higher, and the USD may fall back towards the 50.0% Fib at 9,828 to test for near-term support.

USD_Rally_Overbought_Yen_Strength_Heightens_Risk_Of_BoJ_Intervention_body_ScreenShot019.png, USD Rally Overbought, Yen Strength Heightens Risk Of BoJ Intervention

Three of the four components weakened against the greenback, led by a 0.91% decline in the Euro, while the Japanese Yen rallied across the board following a drop in carry interest. The rise in risk aversion should help to spur increased demands for the JPY, but the recent strength certainly heightens the risk of seeing a Yen intervention as the USD/JPY approaches the record-low at 75.94. As the marked appreciation in the local currency dampens the outlook for future growth, the government may put increased pressures on the Bank of Japan to depreciate the Yen, but the central bank may continue to sit on the sidelines as it looks at a broad range of tools to shore up the ailing economy. Although the BoJ is widely expected to keep the benchmark interest rate at 0.10% later this week, the central bank may continue to expand its nonstandard measures, and the central bank may carry its easing cycle into the following year in order to stem the downside risks for growth and inflation.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

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