World Currency Watch: FOREX Market, FOREX Trading BLOG

USD/JPY may be heading for 109 to 110? Here's why.

The markets have stabilized a bit in the short term as the world sees that the U.S.government and U.S. Fed are trying to fix the sub-prime/credit crunch problems.

 

Bernanke tries to put a “safety net” under stocks.

They even know from Ben Bernanke’s speech yesterday that the Fed is fully prepared to cut rates again to “insure” (and ensure) stocks from falling.

 Then I also ran across this story about how the Japanese housewives and pensioners were positioned:

 Generally “Moms and Pops” are usually on the wrong side of the market.

Feb. 13 Dollar sales by Japanese individual investors on the Tokyo Financial Exchange rose to the highest since June yesterday.

Housewives, pensioners and businessmen accelerated sales of the U.S. currency by capitalizing on yesterday's 0.3 percent advance against the yen, betting it will resume its eight-month decline.

Technical Divergences in the RSI Indicator are in the favor of a short term pop upward for USD/JPY.

My hopes are that this recent upside breakout in USD/JPY will catch them on the “wrong side of the market” for our benefit.

Coupled with this thought ….as I look at the charts…I see divergences. This is simply when an indicator moves one way, yet the price action actually moves the opposite. This usually signals a strong temporary “pop” in a currency. The last time this happened, it drove it up towards its downtrend line. I’m anticipating this to happen again. Check out the chart below.

Divergences cause short term “pops” in currencies.

Upon taking a closer look at USD/JPY, on the 4 hour, 40 day chart… I saw new buying pressure coming into the dollar. It broke above the horizontal resistance line (black) below. This pushed it out of its sideways range.

 

Downtrend, Sideways Range, then Uptrend?

USD/JPY on its way to the 109 to 110 levels?

 I believe as we exercise some patience, we’ll see this pair hit our 108.55 target (profit target for the 1^st ½ of the trade). Then the pair should head towards the 109-110 levels.

 So as long as the Dow and Nikkei don’t turn down harshly in the near term, this is how I anticipate it all playing out.

Sean Hyman

Editor/Trader

www.money-trader.com

Transports and Technology lead the way in a stock market recovery which could help the buck.

When an economy starts to come out of a recession, two sectors tend to lead the way. Those are transportation stocks and technology stocks.

The reason for this is that when corporations think they are about "out of the woods", they start to order more inventory. This gets to their stores by these transportation companies. This puts more dollars into the pockets of transportation companies sooner than that of much of the economy.

Therefore, transportation stocks tend to lead the way when an economy is about to recover. So watch the Dow Transportation Average (symbol:TRAN) so see if these lows hold at around 4100. Also, see if the price can break above the "broadening pattern's" upper black line. If so, both of these would be a bullish sign.

Right now, we've got our first glimmers of hope as the long term support has held (blue horizontal line below) and the MACD has come back above the zero line and has broken its downtrend. Now lets see if the actual price action can make a "higher low" and take a stab at the upper black line. If it can break that, then that could forecast the "beginnings" of the end of a recession. Check out the chart below. Click on it to enlarge it.

The Transports are trying to form a bottom @ the 4100 level.

Technology stocks are usually the next in line when a recovery is beginning. This is because companies "beef up" on technology because it makes their businesses run more efficiently and they feel they can start to spend on these things once again as they feel that business is about to improve.

Therefore, watch the high tech index (symbol: MSH) to see if this 3 year uptrend line holds around 500ish. There's also a head and shoulders pattern below that targets 500 as a minimal price target for the fall in prices. So if the 500 level holds and the RSI downtrend line can break to the upside, then that sector could "perk up" as well. Check out its chart below.

Watch to see if Technology stocks form a bottom at the 500 level.

So what does all of this have to do with currencies? Simple...currencies judge the "macro" or "big picture" of an economy. When an economy improves, so does the sentiment surrounding that economy. When that happens the currency is likely to improve also as buyers come back into the currency.

So if we can get a recovery in stocks from this shallow recession that we've been in, then the buck will likely get a bouce and gather some stream too to trade out of its sideways base around its 30 year lows.  If so, that would allow it to head higher this year against the other major currencies. After that, the buck will probably go back to its long term fundamental problems and sink further.

However, for this year...the buck will likely catch a break...much like it did in 2005.

Sean Hyman
Editor/Trader
www.money-trader.com

Retail Sales may be the catalyst that drives USD/JPY out of its slumber!

Lately the USD/JPY has been comfortably resting in a calm range while most currencies have been whipping all over the map.

One thing is certain. Periods of low volatility beget periods of high volatility and vice versa. Look for USD/JPY to break its recent range very soon. As a matter of fact, it may have a great chance at breaking it when the U.S. Retail Sales numbers come out at 8:30 am EST on Wednesday.

News events can be great catalysts for a range to breakout. After all, big traders want to see something that causes them to get bullish or bearish on the currency. Given the "new data" to work with, that can be the catalyst that's needed.

Don't get me wrong, it could break out sooner or later than that. But watch to see how it deals with the Retail Sales this week if it hasn't broken that range shown below by then. Click on the chart below to enlarge it.

USD/JPY idles as it awaits a catalyst.

Look for a close inside one of the boxes in the chart and you'll likely have your direction for the near term on USD/JPY.

Lately, money has been flowing into both of them which is what has been equalizing each of them against each other lately. So the Retail Sales number could be the "tipping point".

Later on this week, the Bank of Japan will announce interest rates. It's not expected that they'll change rates. However, there have been rumors flying around that Japan will actually cut rates to stimulate the economy. We'll know soon if that's a load of crap or if there's something to it.

Sean Hyman
Editor/Trader
www.money-trader.com

One Bright Spot for the U.S. Economy!

Well, you do have to search long and hard these days to find a "bright spot" for the U.S. economy...but here goes.

The Home Builders Index is starting to recover even as other stocks continue to slide. (See the chart below. Click on it to enlarge it.)

If the index can produce a "higher low" shortly, then the stocks could be beginning a recovery.

Now, with that said, ...stocks try to recover at least 3-6 months before the actual fundamentals do. The institutions buy them up (while still at the bargain basement prices) a bit before everyone else realizes it (which is when the fundamentals actually return to the sector).

So it's not certain that we're out of the woods yet in the U.S. housing sector...but just the fact that there's been strong enough buying to break the downtrend line is a good start. So now there's hope for the first time in a long time.

If this does in fact turn, then it could give stock investors a reason to return to stocks and it certainly is a big vote of confidence for the U.S. dollar.

Look for the dollar to rally this year as it "holds its own" against the euro and British pound in particular. I think in 2008, you'll see a dollar recovery just like you did in 2005. After that, the underlying problems in U.S. economics will probably take back over and thrust the dollar lower. But we've got 6-12 months or so before that happens. In the mean time....go USD go!

Sean Hyman
Editor/Trader
www.money-trader.com

The Japanese yen is "eating up" the 550 point drop in the Nikkei and 370 point drop in the Dow today. Those that are selling short EUR/JPY are happy.

The Dow plunged today on more recessionary fears that the ISM Services placed on the market. It showed that the Services sector (which accounts for 88% of the U.S. economy) fell into a deep contraction with a reading of 41.9. A reading of 50 or below is the "bust" level. Above 50 means the sector is growing.

This "sucker punched" stocks that were already down for the count today. The Dow Jones Industrial Average fell over 370 points. It's going to take more interest rate cuts and Congress better get those checks mailed out quickly. Yesterday would have been fine. However, those will still likely mail sometime between May and July. 

Meanwhile the Nikkei took its lead from the Dow today and has fallen over 550 points so far in the Asian session. The sell off has been harsh. However, if the U.S. slumps, so does Japan. For the United States is one of its biggest customers. If your customers are hurting, so are you.

This stock market sell off is causing money to run and hide in all of the beaten down assets including the Japanese yen (mainly), the Swiss franc (secondarily) and lastly the U.S. dollar.

Therefore, the yen is rallying against everything basically. EUR/JPY is about to break a multi year trend line if it falls much further. GBP/JPY is one step ahead of EUR/JPY in that its already broken a major uptrend line. Even the Euro is having a hard time holding up to the U.S. dollar due to all of this...as traders run from the "lofty" assets into what is deemed to be "beaten down".

Don't expect this to stop today. For there's more where that came from.

Now you can see why the seven biggest industrialized economies are all meeting together in Tokyo this weekend. All of those central banks are shaking in their boots. They are realizing that this is such a huge problem that they're going to have to "team up" in order to tackle it. Even then it won't provide an instant solution....and anything they "fix" in the short term always causes the markets to "pay up" in the long run.

Alll of the "pumping of money" into the economy and making the price of money cheap by cutting interest rates will eventually save these economies from deep recessions in the short term, even though it won't stop at least a mild recession in the near term. However, because they're trying to buffer the fall, it will cause tougher times on down the road, as this "cheap money" inflates things once again and causes yet another asset bubble later on. Sometimes it takes years for the next bubble to arise...but you can bet it will come.

That's one thing the central bankers either don't realize or don't care about at the moment. Just as Greenspan lowered rates to 1% to give the economy a shot in the arm, the cheap money caused housing prices to inflate and form a bubble. Now the economy is suffering. So what do we do...we make money cheap again to save the economy again....yet we're going to have another bubble down the road because of it. It's just a matter of "where" and "when". That's the only real question.

In the mean time, those that are "short selling" EUR/JPY are particularly happy right now. If you have a long term stock portfolio, selling short EUR/JPY could be a great way to hedge the losses that are incurred in the stock portfolio too.

 

Sean Hyman
Editor/Trader
www.money-trader.com