As anticipated, we saw a big breakout in USD/JPY. It was to the upside after the Bank of Japan announced an emergency meeting for today. They will likely implement further quantitative easing measures to combat deflation. The effect is most likely to be a further yen negative unless the BOJ announces some very limited measures.

As noted earlier, 87.53 will be a key resistance level to break if we are to see a continued USD recovery.

A wedge pattern is set up in USD/JPY on the hourly chart.

This pattern usually signifies consolidation after a big move and that is exactly what we saw in this pair over the past week.

The wedge formed after a new 14-year low in the pair on Friday. In today’s trading it has consolidated in a tightening pattern as Japan’s non-intervention statements clashed with declining risk appetite.

Generally, a wedge pattern sets up a big move, normally in the same direction as the previous move. In this case, a break of the supporting trendline could initially target the 14-year low of 84.43.

The key level on a rebound will be 87.53, which is the 61.8% Fibonacci retracement of the down move. A break above that would open the way to a return to 89.19.

The bias has be toward more U.S. dollar weakness but if there was a time to see a big gap lower in the greenback it might have been today. Most charts were set up very bearishly for the dollar at the start of the session but buck held its ground.

On the other hand, USD/JPY was set up quite bullishly after the turnaround on Friday. That generated a massive reversal signal but the follow through has been lackluster.

What’s important to keep in mind is that Thursday and Friday trading came on low volume because of the U.S. holiday. Undoubtably, that created some confusion in the market and some mixed signals. In the next 24 hours, we should see some clairity.

We are seeing some textbook reversal patterns GBP/USD.

The culprit was Friday’s volatility. The extreme push lower followed by the higher close formed a hammer pattern on the daily chart.

What makes this chart so compelling is that it appears in USD/CAD, EUR/USD and AUD/USD as well as in oil and gold.

The short-term case is also a textbook pattern, this time it’s an inverse head-and-shoulders that targets the 1.6725 – 1.6747 resistance.

The neckline was broker early in the sesssion today and so far, the price action has been convincing. There is no significant resistance. A fall back below 1.6500 wold be a troublesome scenario for the bulls.

How does 500 pips in 22 hours sound?

That’s how much EUR/JPY has fallen. Risk aversion is gripping markets after news that Dubai World is struggling to meet its debt obligations triggered solvency fears around the world.

Most U.S. traders were on holiday on Thursday so what we have seen so far could be just the beginning. We are seeing major breakdowns in many charts, with all the yen crosses tumbling.

Japanese government officials and central bankers are growing extremely concerned and there may be some sort of intervention in the day or days ahead. Japanese Finance Minister Hirohisa Fujii says he may contact the U.S. and Europe “if necessary.”

The comments are designed to scare currency traders away from speculating on a further yen rise but there are likely to be statements from other countries and the G7 before we see any real action.

Let’s take a look at the chart of EUR/JPY in the past two days.

We see a huge plunge from 133.50 to a low of 127.09. That’s nearly a 650 pip move, most of it coming after support at 131.50 broke. At the moment, we are seeing some consolidation but more volatility is certain in the day ahead. As always, the trend is your friend but with a chart like this one, you need to get a good entry position and continually protect profits. Beware of any rallies over 129.63 and 130.04 is likely a pivot point.

You can bet that the people at the Federal Reserve have been glued to thier Bloomberg terminals all day with one chart on their screens — USD/JPY.

Today’s fall in the pair is no doubt a frightful one. One day after the FOMC minutes revealed that the Fed regards the dollar decline so far as “orderly”, we’re seeing the first signs of a disorderly decline.

In short, things could get start to get ugly here.

One of the tenants of forex technical analysis is to look at intermarket dynamics. There are correlations; some strong, some weak. One of the better correlations of the past two years has been that when stocks risk, the U.S. dollar makes gains against the yen.

Today, with the S&P 500 up 5 points and near a one-year high, we are seeing the U.S. dollar getting crushed against the yen and everything else. Another tenant of technical analysis is that when correlations start to break down, something is changing. What is changing here? Could it be that we are seeing the beginning of a massive dollar sell-off? It’s starting to feel that way.

But before we get too ahead of ourselves, let’s keep an eye on the calendar. Thursday is U.S. Thanksgiving and that should sap trading volumes. Afterwards we get into a bearish seasonal period for U.S. stocks and any sustained decline should boost the U.S. dollar.

What we want to watch, more than anything, is the same chart they’re watching at the Fed.

USD/JPY four hour

We can see that critical support at 88.00 has broken. We wouldn’t be surprised to see a retest of that level before the weekend but the technical damage is done.

What’s truly scary, however, is not that we’ve broken the support on the four hour chart. It’s that we are very close to support on the long-term charts. The weekly support on the left side of this chart is a 14-year low. A break below here would open up the possibility of a test of the all-time low of 80.

Needless to say, this weekly chart shows that we’re already within a few pips of some very, very critical support.

For traders, remember that support levels like these are rarely broken on the first try. We may see a break and then a retest and overall volatility. Still, the implications don’t look good for the U.S. dollar if 87.12 can’t hold in USD/JPY.

What might happen in the event of a disorderly decline in the U.S. dollar? Here’s what the FOMC said in yesterday’s minutes: “Any tendency for dollar depreciation to intensify or to put significant upward pressure on inflation would bear close watching.”

Such a decline in the U.S. dollar has the potential to create a massive conundrum for the Fed. If inflation rises, they will need to raise interest rates. But can they raise interest rates with the housing and banking sectors so fragile? If they are forced to raise rates, what will that do for the recovery? If they don’t raise rates, what will it do for the dollar?

This is what the Fed is worried about right now. Watch dollar-yen closely and listen to what the Fed says next.

The biggest moving G10 pair on Tuesday was NZD/JPY. It fell 1oo pips to 64.25 from 65.25.

For the last 5-7 years this pair has represented the carry trade. Leveraged traders borrow in yen and invest in NZD-denominated securities. The reason is that Japan has had the lowest interest rates and New Zealand the among the highest (they were the highest until last year when they were surpassed by Australia).

The yen-kiwi carry trade was an incredible trade from 2000-2007 as it marched higher and higher. The reason this trade is so lucrative is that it’s self-fulfilling. As people borrow yen move them out of the country and into New Zealand dollars, the effect drives down the yen and props up the kiwi.

Eventually, a huge speculative bubble formed leaving the yen undervalued and kiwi overvalued. When the credit cruch hit, traders rushed to the exits en masse. We can remember one particular day at the height of the credit crunch when this pair fell 13% in a single day. Imagine a country losing 13% of its relative value in a day! It was pure insanity and an incredile trading opportunity because it represented a 1000 pip move.

In the past nine months, we have seen traders re-enter the NZD/JPY carry trade and it has been trending steadily higher.

NZD/JPY weekly since 2005

On the extreme right of the chart, notice that the momentum looks to be dwindling. The Reserve Bank of Australia continues to deny the possibility of rate hikes and has warned carry trade participants that they’re going to get hurt.

In the past day, that is what has happened, as we saw a series of swift falls.

15 mins NZDJPY

We have drawn in the line at 64.03 for emphasis. Late yesterday this created a perfect double-bottom. This was an encouraging sign for the bulls but the bounce only reached 64.65 before plunging below 64.00. This is a worrisome signal for the pair and for risk aversion as a whole. Fortunately, there is some very strong support down to 63.88 but if that breaks, beware of a swift fall to 63.00.

Nothing builds the tension in the forex market like a range trade.

And at the moment, EUR/USD continues to show all the characteristics of a great range trade. It has flirted with the top and bottom of the range several times, including a handful of false breakouts and headfakes.

Take a look at this chart and envision yourself selling near the top line and buying at the bottom line.

It looks like a 200 pip machine. Of course, it hasn’t been without some scary moments. Last week was a big one as the market bounced 90 pips at 1.4850 only to fall through the bottom of the range in a false breakout.

Discipline is the only way to fight headfakes but false breakouts can be contended with by using wide stops.

Another way to limit risk is by taking only one side of the range trade. If you have a bias toward an eventual breakout, sell two or more units on that side of the trade and book a profit on half when it nears the edge of the range.

Of course, playing the breakout trade is the big, sexy trade. The interesting thing at the moment is that it is very difficult anticipate a breakout on either side of the range in the next few days.

On the topside, resistance runs up to 1.5060. A daily close above this level would probably assure a significant test of the 1.61 all-time high.

On the downside, we are now seeing significant support at 1.4800 followed by less important support at 1.4686 and 1.4627. if the range breaks on the downside, it may just open up a wider range trade. At this point, the technical picture for a full-on reversal just isn’t strong enough.

There are a few charts to watch in relation to the range. The first is the S&P 500. Today, we saw a big jump in U.S. stocks that narrowly failed to take out the 2009 high of 1113. We don’t see this as a failure … yet. If there is a meaninful reversal below 1100 in the next two days, it could serve as a double top. If we see a break above 1113, the bias is certainly toward a rally in the euro.

A second chart is gold, which hit a record 1171 today. For years, the euro and gold have been correllated. This time, it seems the euro was way out in front of gold. Gold should start to encounter resistance leading up to $1200. A break paves the way for a euro test of 1.60.

The third chart to watch is EUR/JPY. This chart is THE measure of risk appetite in markets. Unlike stocks and gold, this chart is flashing some definite red flags.

The downtrend is obvious on the three-month chart. What’s especially worrisome is that we are appearing to turn lower after bouncing off major support at 131.70. If we don’t see a move higher and break of 133.60 in the next day or two, we expect to see a swift fall toward 130.00.

 In the day ahead, the preliminary report on third quarter GDP is expected at 2.8% from 3.5%. Unless we see something close to a half-point from the consensus, we don’t expect a large impact from this report. The market is more concerned about the final quarter of this year and Q1 2010. Also, keep a close eye on the Ifo and U.S. home sales data.

It looks like our Australian dollar call was a good one, especially if you could bear the head-fake in the first hour of the trading week. We still see plenty upside in this trade but the economic data in the day ahead will play a big role.

Is AUD/USD ready for another push higher?

This chart has tended to overshoot in the past before a swift move higher. The trendline has been tested four times in the past. It has rallied virtually every session (14 out of 16 days, with two minor down days) in the four sessions following a failed break. The average gain in the four days that follows a failed break is slightly more than three cents.

On factor that raises some concerns is that the daily Bollinger hasn’t tested the lower band like in other instances. This raises the possibility of a further correction.

On the hourly charts, we see further reason for guarded optimism. Since the peak at 94 cents on Nov. 16, the rebounds have followed a similar pattern with a rebound to the 61.8% and 38.2% Fibonacci levels. The most recent decline has already rebounded above the 61.8% level, suggesting a 100% retracement to 0.9210.

With this sort of scenario in mind, a short-term trader may wish to go long AUD/USD now, risking no more than 0.9100 with a target of 0.9200. After that target is achieved wait for any pullback to establish new AUD/USD longs, never risking more than 0.9100.

Markets are always in a precarious balance but with stocks pulling back today and the EUR failing to break 1.50 against the USD, it feels as if there is a prolonged agony in the forex market.

At the moment, we can see that the 1.5050 – 1.4800 range is well-established. What makes it so important is that 1.50 has capped the euro in the past and a definitive break higher will probably mean a re-test of the all-time high near 1.60.

What we’re seeing is a negative scenario developing. We see lower highs since the failure at 1.5050. At the bottom of the range, 1.48 looks like solid support but if it breaks, there will likely be extended downside. Looking at the stochastic chart, a break lower is the favoured scenario but go with a break in either direction.

The great thing is that a resolution is imminent.

The big question on everyone’s mind on Wednesday is whether the rally in EUR/USD will be sufficient to send the currency towards a retest of the 1.50 mark, with an eventual breach of the daunting 1.5063 from October 26. Those who favour the move should be encouraged by the fact that the cross appears to be ignoring the small amount of risk aversion in the markets on Wednesday, pushing towards yesterday’s 1.498 high.

The news flow has also been relatively mixed, with U.S. CPI coming in stronger than expected earlier this morning (USD-bullish), but comments from Fed’s Bullard saying rates wouldn’t be hiked until 2012, gave the cross the lift needed to overcome those fears.

Should a breach successfully occur, it could leave the door open for the 1.5047 level and a subsequent challenge of the October 26 level.

Tomorrow’s Philly Fed manufacturing Index and jobless claims could provide the necessary catalysts.

After making fresh 15-month highs on Monday, the Australian dollar is once again backpedalling on Tuesday, although the losses should be capped by the currency’s longer term upward trend.

Coming up to noon EST on Tuesday, AUD/AUS is down 110 pips at 0.9259 following yesterday’s high 0.9402 level, its best level Since August 2008’s 0.9423 level.

On the other side, the short term technicals suggest the pair has some room to pullback before once again surging.

The fundamentals also support a stronger currency, even though the RBA surprised the markets on Monday evening, by failing to deliver the hawkish rhetoric expected by many.

Nevertheless, central bank authorities has clearly stated that rates are going up in Australia, and as long as the Fed remains on hold, this spread should give traders reason to push the AUD higher.

USD/JPY is moving lower, having broken though support at 89.29 just moments ago, the moves now leave the door open for a retest October 14’s 88.84 level.

The moves come on the back of a combination of better than expected economic data out of Japan earlier on Monday, and a strong decline in risk aversion in the global equity complex throughout the morning.

Earlier in the day, the Japanese authorities reported that preliminary Q3 GDP beat the consensus call for a 0.7% rise on the quarter by gaining 1.2%, following the revised prior 0.7% increase. Annualized, GDP expands 4.8% versus expectations for only a 2.9% gain and following the previous revised 2.7% increase.

Meanwhile, after strong showings in Europe and the Asia-Pacific, North American stocks are on a roll on Monday, with the S&P 500 up 1.5% and the Dow higher by 1.2%. The moves have put downward pressure on the greenback.

Nevertheless, comments from Fed Chairman Ben Bernanke later today have the potential to send the cross backpedaling, particularly if the Fed Chairman suggests the Fed may be beginning to look at scaling back some of its accommodative monetary policies. On the other hand, more promises of low interest rates could weaken the greenback further.

USD/JPY is approaching some key resistance levels after the pair lost ground on the back of U.S. dollar selling and important developments in China.

From a technical perspective the cross has been in a broad downtrend since mid-October, however the pair has failed to confront the October 13 low of 88.84.

Nevertheless the last 48 hours have seen some of an acceleration of the declines, particularly after Chinese officials affirmed that they were considering a revaluation of the Chinese currency against the USD. Such a development would be bullish for the yen, argue traders.

Also working in favour of the yen, were promises from Japanese officials to try cutting down the request for additional fiscal spending last month. Japanese Finance Minister Hirohisa Fuji promised this morning to reduce the request for additional funding by “trillions” of yen, another development which is bullish for the currency.

USD/JPY needs to break support at 89.29 for this to be achieved, however, after which a test of the 88.84 level is possible.

Stocks may have managed some gains on Monday, but EUR/USD continues to head lower, coming off a head-and-shoulders pattern from the last several days. Instead of retracing losses against the USD, as have some of the other pairs, the single currency continues to be battered by technicals calling for lower valuations. Meanwhile November 9ths 1.4852 support has managed to hold although there are no guarantees the cross will hold if risk aversion continues. If breached, the next support lies at 1.4814.

There were no fundamental news to drive the moves this morning, except that U.S. Treasury Secretary Tim Geithner said the TARP could use used to pay off part of the country’s soaring deficit in the overnight. While such a development could help the USD in the long run, the deficit nevertheless remains nevertheless daunting.

The Australian economy continues to chug along as the nation added 24,500 jobs in Oct. compared to the 10,000 jobs that were expected to be lost. As a result, the Australian dollar surged to a 15-month high of 0.9368 against the U.S. dollar.

The details of the report tempered the enthusiasm somewhat as the unemployment rate rose to 5.8% from 5.7% (as expected) and data revealed that almost all of the jobs created were part time. Still, the overall picture of Australia remains the healthiest of all major economies.

Technically, the break higher pushed AUD/USD above yesterday’s highs and on pace for a retest of the July 2008 high of 98 cents.

All signs point to a retest of 98 cents

Technically, the AUD/USD chart has been the ‘risk’ leader throughout the recovery. Charts like NZD/USD and EUR/JPY have shown warning signs but the Austrlian dollar continues to make a convincing case for bullishness.

On cautionary signal may have come from the S&P 500 today. After touching a fresh 2009 high, it pulled back below 1100, which is also the 50% retracement from the high. If it can close above 1100 in the coming days, it points to a rise to at least 1227, something that would ensure a re-test of 98 cents in AUD/USD.

For shorter-term traders, expect the bullish enthusiasm from the employment report to solidify a rate hike at the Dec. 2 Reserve Bank of Australia meeting and spark chatter about the possibility of a 50 basis point hike. At the moment, the market is pricing in just an 87% chance of a 25 basis point hike. As that moves toward 100 in the next day or two, it will provide tail winds for the Aussie dollar.

The euro is close to the 52-week high against the U.S. dollar after a nearly two cent surge on Monday but the lack of follow-thru today puts up some red flags but there’s no need for euro bulls to worry.

The euro is trading at 1.5003, a 350 pip rally in less than a week. The European single currency has benefitted from increased risk appetite and long-term fears about the U.S. dollar. The euro also tends to trade in tandem with gold, which hit a record 1106 in the past 24 hours.

What we have seen over the past few weeks is a stread, methodical rise in the euro.

We can see that the 50-day moving average has supported EUR/USD on its methodical move higher.

What is especially interesting is that a break above the previous high, in the past, hasn’t always generated a powerful move higher. Instead, we see consolidation and then another gradual assent.

So far, recent trading follows a similar pattern. We see a pullback to the 50dma followed by a methodical move higher. At the moment, we see the euro struggling to make a true test of the 1.5063 high from Oct. 26. This isn’t necessarily a bearish signal for the euro. It would be normal for the currency to consolidate in this range before pushing higher. A short-term trader might look to sell EUR/USD at these levels and pick up 50-100 pips while protecting against a move above 1.5050.

Let’s take a look at the hourly chart for further confirmation:

What we see here is in the most recent 24 hours is a descending wedge pattern. This is interpreted as a bearish signal in technical analysis because we’re seeing lower lows and the inability of the market to make a new, short-term high. Something like this is also indicative of a period of consolidation, similar to what we saw on the daily chart.

Still, it’s very difficult to be bearish on EUR/USD beyond 100 pips unless we see a massive plunge in the stock market in the coming 48 hours. Instead, any pullback could be used to buy euros for an eventual push higher. Remember that the trend is your friend and EUR/USD is one of the clearest, most consistent charts anywhere.

Moreover, if the euro can break above 1.5063, there is no significant resistance all the way up to the all-time high of 1.61.

A rally in oil led to a sharp sell-off in USD/CAD on Monday.

Improved market sentiment, risk appetite and potential disruptions due to Hurricane Ida, led to a rally in crude oil that spilled over into USD/CAD. Canada is home to the world’s second-largest proven petroleum reserves and the Canadian dollar is very sensitive to moves in crude oil prices.

USD/CAD was on a stead trend lower throughout the session, falling from 1.0775 to 1.0550 in an especially orderly fashion. The trade was a trend-follower’s dream.

In the past several hours, we have entered into a period of consolidation. Oil has fallen from $80 to slightly below $79 and we have seen a rebound in the pair to 1.0576. After such a long and steady decline, a period of consolidation and range-trading is normal. We the first target on a rebound will be the 1.0594 low from late last week. In the past, the 1.06 range has proven to be a key swing point in the currency, so a re-test of that level before a further decline would be the most likely scenario. A rebound to this level would also coincided with a bounce to the mid-point of the Bollinger Bands (shown).

Undoubtedly, the trend is higher. In the past week, we have seen early selloffs every day but the sterling invariably recovers and rallies. Still, the charts show the pound is now entering an area of stiff resistance, so a correction could be in order.

First, lets take a look at the daily chart. Here, it’s easy to see the difficulty GBP/USD has had in breaking above 1.6700. In six attempts, it was immediately rejected in five with one short-lived breakout.

Lots of resistance ahead

Aside from the one breakout, the day following a failed retest of 1.67 has seen drops of at least 150 pips. The most recent failed test — on Oct. 27 — was followed by a nearly 400 pip fall.

On the hourly chart, we see the strong support around 1.6250 that has led to the push toward 1.6700. We also see early signs of the failed test of 1.6700 as the market opened higher to start the week but has quickly pulled back to unchanged levels.

Look for another powerful rejection of a 1.6700 in the day ahead or for a breakthough a short squeeze higher. No doub, it will be an interesting day for sterling traders.

Non-farm payrolls is always our favourite time of the month. It’s when the U.S. releases the most recent employment data and it’s always a major market mover. This month’s report — which will be released a 8:30 a.m. New York time on Friday — is especially anticipated given the heightened volatility in the market and the potential for massive reversals.

Technically, there are some very fascinating signals on key charts that indicate Friday is going to be an exciting trading day.

A chart we have been watching closely for the past few days is NZD/USD.

We noted how it broke below major trendline support and then yesterday rebounded in a retest of that support. If failed, however, after a disppointing employment report from New Zealand.

Today, despite the enthusiasm in stock markets, the risk-sensitive kiwi could hardly catch a bid. A big part of the reason were comments from Reserve Bank of New Zealand Governor Alan Bollard. He compares Australia and New Zealand:

Bollard said both countries have survived the crisis well, due to a mix of strong institutions and stimulative policies.
“However, their immediate prospects are different. Australia has avoided negative growth, and its prospects are driven by strong terms of trade, vast mineral deposits, the Chinese market, and rapid population growth.
“New Zealand has had a recession, and the pick-up is slower and more vulnerable – a difference financial markets do not appear to appreciate.

“This is particularly evident in the relatively stable cross-rate on foreign exchange markets. If financial markets can’t see the differences, they will eventually lose money, and it will hurt the New Zealand economy.”

We all know the expression “Don’t fight the Fed.” The question now, is: “Do we fight New Zealand’s central bank?”

This isn’t the first time Bollard and the RBNZ have tried to talk down the kiwi, but it’s by far the most explicit. The reason he wants a weaker New Zealand dollar is because it assists the manufacturing and exporting community.

Back to the chart: notice the final two candles. They are a candlestick shape that’s called a doji star. It occurs when you have long shadows and a nearly non-existent real body. It’s the classic sign of market indecision. It makes great sense in the kiwi because we have seen a long uptrending period but now the market is unsure if it wants to continue higher (back above the trendline) or plunge down into the 60-cent range.

What is particularily interesting about the kiwi is that it’s probably the most risk-sensitve currency at the moment due to its struggling economy and the huge run-up it has experienced in the past 7 months. Where the kiwi goes, the rest of the market may very well follow.

We are seeing similar patterns in USD/CAD and EUR/USD. Both traded in very tight ranges over the past 24 hours and are likely to experience a big move on Friday.

The deciding directional factor will almost assuredly be nonfarm payrolls. The October report is expected to indicate the U.S. economy shed 175k jobs in the month, an improvement from the 263k shortfall in September. The unemployment rate, meanwhile, is forecast to rise to 9.9% from 9.8% the prior month.

Look for something above 250k, or below 100k to really get markets moving. If the unemployment rate rises above 10%, look out.