Is Japanese Yen Volatility Finally Under Control? – USD JPY June 25, 2011 |
The USD JPY traded lower on Friday. Since bottoming on June 8 at 79.69 and topping on June 15 at 81.05 the market has been rangebound.
Trading inside the major retracement zone at 80.94 to 79.86 seems to be indicating a stable currency. The fact that the market is almost exactly in the center of the tsunami low and the central bank intervention high is also an indication of a stable market. The problem is the Japanese Yen needs to be lower in order to stimulate its economy and increase exports. Since there isn’t a blue print on how long it takes a country to recover from an earthquake, tsunami and near-nuclear disaster, my guess is a stable currency is alright given the circumstances.
While speculators may find it difficult to trade the USD JPY while it trades in a tight range, Japanese officials may finally be getting what they have been looking for – currency stabilization. If you’ve been following the news, volatility of the exchange rate has been one of the central bank’s and corporate Japan’s greatest concerns.
This concern was voiced last week by Nissan Motor Co’s chief executive who said Friday that the Yen’s problem isn’t its level, but rather its volatility. He went on to further note how difficult it is to run a company due to rapid changes in the currency rate.
So while a stable currency may create nightmares for speculators, it benefits Japanese corporations that want to get control over their operating expenses.
Another factor which may affect the Japanese Yen adversely over the short-run is the strength of the U.S. Dollar. Now that the Fed has ended its stimulus plan and has no other plan in the pipeline, the advantage may shift to the Dollar.
This, however, is not going to work if equities continue to weaken creating a situation where investors seek protection in the low-yielding Japanese Yen. Continued weakness in the stock market is likely to boost the Japanese Yen as global investors reverse the carry trade.
Over the next few days support and resistance traders may have the advantage over swing traders. Selling the 50% price level at 80.94 and buying the 61.8% level at 79.86 may be the trade to execute as long as the USD JPY remains inside the retracement zone.
If trading conditions shift to “risk on” then the USD JPY is likely to break out to the upside. Maintaining a “risk off” scenario is likely to strengthen the Yen.
Technically, the USD JPY is in a downtrend. The main trend will turn up on the daily chart following a rally through 82.23. Currently the currency pair is forming a double-bottom at 79.56 and 79.69. This will not be confirmed until 82.23 is taken out.
The main range for the pair is 76.37 to 85.52, making 80.94 to 79.86 an important retracement zone. This area is controlling the short-term direction of the market. A rally and close above 80.94 will be a sign of strength. While a break and subsequent close under 79.86 will indicate weakness.
While there is no timetable as to how long the USD JPY can sit inside this retracement zone, pent up volatility is likely to trigger an explosive move once the market moves outside of this range with clarity and conviction.
About the author: Forex Mansion Analyst - James Hyerczyk
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