USD JPY Weekly Outlook, Nov 14, 2011

Weekly USD JPY Pattern, Price & Time Analysis

The USD JPY closed lower last week which could be a sign that short-traders are attempting to regain control of the market following the Japanese government’s intervention the week before. The previous week’s range was 75.57 to 79.53. This range has created a retracement zone at 77.55 to 77.08. This retracement zone may begin to control the short-term direction of the currency pair by acting as a pivot.

Technically, the intervention which drove the market from 75.57 to 79.53 turned the main trend to up on the daily chart when this currency pair crossed the last swing top at 77.48. This means that the current downdraft could be corrective in nature and may begin to attract buyers. It’s hard to come up with a scenario that will drive the USD JPY higher other than another intervention or a complete reversal of the lingering debt issues in Europe, but stranger things have happened this year in this market.

Another intervention by the Japanese government at current price levels will mean that it is no longer content with defending its currency when this pair reaches a new low but instead feels now is the time to finally put this matter to bed by driving it completely away from the all-time low. A move at this time will send a message to traders that this matter is serious enough to warrant an aggressive strike to protect the Japanese Yen from excessive speculation and volatility.

This week traders will be watching the release of Japan’s 3rd Quarter Gross Domestic Product report. Forecasts call for growth of 1.5% versus -0.5% last quarter. A positive growth figure will indicate that Japan is recovering from the March 2011 earthquake and tsunami. It may also prove that intervention is working because it protected the country’s export business by slowing down the rise in the Yen caused by excessive speculation and demand for the safe-haven currency during unstable times in the Euro Zone.

Traders should note that a positive GDP figure will only mean that Japan is in the early stages of recovery from the earthquake and tsunami. It should not be interpreted as though the country is ready to put all of its problems behind. There may be some swings in the country’s GDP moving forward, but construction in the damaged areas should provide enough support to keep government officials optimistic.

A friendly GDP figure poses a problem for the Bank of Japan if it remains committed to a weaker Japanese Yen. A better than expected number could send traders in the Yen, triggering a rise. In addition, as long as Euro Zone officials don’t have a solid solution to the lingering sovereign debt issues plaguing the area, there is going to be the possibility of risk aversion. This will send down demand for risky assets and drive up the need for safe haven currencies such as the U.S Dollar and the Japanese Yen.

If the Japanese Yen begins to rise for this reason then the government is going to have to consider whether it wants to continue to fight the trend with additional rounds of intervention. It may decide that the market forces are just too strong for it to work in the long-run. After all, the Swiss National Bank had to abandon its intervention program because it simply began to cost too much. It eventually turned to pegging its currency against the Euro.

It may not be this week, but the Japanese government and speculators seem to be on a collision course and the one who blinks first will end up the loser. Not only will the Japanese government be out its intervention funds but the economy may take another turn south if a sharply higher Yen kills the small growth in its GDP.

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James Hyerczyk

James A. Hyerczyk has worked as a fundamental and technical financial market analyst since 1982. His technical work features the pattern, price and time analysis techniques of W.D. Gann.

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