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USD/YEN Channel Resistance Could Bring End to Reversal
Written by article default Thursday, 11 November 2010 09:44
The dollar has managed to regain its footing as higher U.S. yields and declining commodity prices have been sources of support. The USD/YENis at its highest level in a month as yen weakness has also contributed to the pair’s rise. Speculation that China is aggressively selling Japanese bonds is adding to the Asian currency’s troubles. However, risk appetite has faded as markets start to focus on the repercussions of Fed QE which favor the yen. Also adding to a gloomier picture is renewed concern over European sovereign debt as Irish yields continue to push higher. The pair is up against a five month descending trend line which is being reinforced by the 50-Day SMA at 82.89. Failure at the upper channel bound would inspire a cautious bearish position.Levels to Watch:
-Range Top: 82.80 (Trend, SMA)
-Range Bottom: 79.15 (Trend)
Suggested Strategy
* Short: Place an entry at 82.75
* Stop: Set the stop to 83.25-50 pips in risk
* Target: The first target is 81.55-11/10 low
Trading Tip – Recent volatility in markets has left us with little predictable formations outside the existing USD/JPY channel. Longer-term we remain bullish the pair which will lead us to take a conservative approach with this set-up, only willing to risk 50 pips. However, the trend lien remains valid and it may take several tests before we see an ultimate break above. Retail longs remain 3.4 times short which is a contrarian signal and increases downside risks. However, the ratio has significantly fallen from 13 at the beginning of the month which adds credence to a longer-term bullish view. Traders that are more risk adverse may want to wait for a break above resistance to take advantage of a larger reversal.
Event Risk for U.S. and Japan
U.S. – The U of M consumer confidence survey is the last event risk for the week and could add to prevailing dollar support with forecasts for an improvement to 69.0 from 67.7. Improving optimism amongst consumers will raise the outlook for domestic demand, but any volatility could be limited with consumption figures scheduled for release next week. The October advance retail sales report could be the biggest market mover on the docket as strong demand heading into the Holiday season will brighten the picture for the labor market, as companies have been reluctant to hire absent consumer demand. The producer price index will see increased focus as inflation concerns are on the rise following the Fed’s announcement of QE2
Japan – The only Japanese fundamental release of note will be the third quarter GDP report as the struggling Asian economy could be on the verge of contraction. Negative growth could see Yen weakness accelerate as investors sell Japanese assets. Otherwise, the currency will be at the mercy of broader trends with an increase in risk aversion potentially leading to support.
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