Will the USDJPY Bears Soon Wake Up? – June 3, 2010

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Here’s an update of the USDJPY pair or the gopher from my previous post. Notice that it has corrected after hitting a low just below 88.00 during the first week of May. With the stochastics almost in the overbought territory, will the pair turn around and move lower again? There is a significant resistance at the psychological 92.00 marker and at the 61.8% Fibonacci retracement level that I labeled in the canvas. Why? Well, 92.00 happened to be a neckline of a double top formation. Anyway, if it is able to move past and clear these resistances, then reaching its 2010 high just below 95.00 would not be too farfetched. On the other hand, it could decline to its next support levels at 90.00, 89.00, and 88.00 if selling carries on.

Fundamentally, the political instability in Japan has dented the JPY’s ‘safe haven’ status, causing it to weaken against most of the other major currencies. Yesterday, Japan Prime minister Yukio Hayotamo voluntarily left his position when he failed to fulfill his promise to remove a US military base off of Okinawa Island. Prior to yesterday, Social Democratic Party leader Mizuho Fukushima was fired when she did not sign the Hayotamo’s recommendation to just move the base to a different location, causing the former’s party to break its ties with the government. This of course led to a lot of protest even by the majority of the country’s citizens. In a month’s time, though, the prime minister’s seat will be filled. So with all these political turmoil already priced in by the market, the yen, in my view, could once again snatch its safe haven status. I mean, how worse could it be? The Prime Minister already resigned with the citizens voicing their concerns and what they want.

In my opinion, the tension in Japan’s political arena will soon abate. Having this, the problems everywhere else particularly the fiscal and debt difficulties of several countries in Europe could still cause some risk aversion. The ECB recently noted that it foresees a new wave of defaults that would hit some major commercial banks in the euro zone. Such scenario would likely lead to a sell-off in non-dollar currencies, benefiting the ones like the JPY and the USD. Between the two currencies, the Japanese yen has the lower interest of 0.10% compared to the 0.25% of the greenback. Such would then prompt the traders to cover their short yen positions and buy it more than the USD during times of risk aversion.

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