We have been advocating short positions in USD/JPY all the way down but looking at today’s chart it’s clear that some caution is warranted. The pair is stabilizing and oversold conditions point to a rebound.

Today’s daily candle forms a bullish hammer reversal pattern. It also forms a double-bottom at 86.96, which was also the low last Wednesday. Further strengthening the case are a multitude of oversold signals, including the RSI, which is just a shade above 30.

A bullish retacement phase would be confirmed by a rally above resistance at 88.05 – 88.15. A reasonable retracement would be back up to 89.25. On the other hand, if we are unable to rally above resistance at 88.05 in the next day or two, we would expect a swift fall toward 0.8450.

We have to give ourselves a big pat on the back for yesterday’s call on CAD/JPY. It was the best trade in the forex market over the past day as it rallied 237 pips.

Here is the updated chart:

There is nothing not to like about this chart. The sell off on Friday is followed by a perfect morning star formation with a close above Friday’s open. Moreover, the move higher stalled just at the former support line. We said yesterday that our initial target was 93.50 and the market topped out at 93.60 before pulling back.

The catalyst for the move higher in CAD was a hawkish Bank of Canada statement. We foreshadowed this in yesterday’s note. Here is what the BOC said about its conditional committment to keep rates low until the end of Q2: “The need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus.” 

For the yen, the catalyst for the slump was the positive tone in equity markets. Stocks worldwide have rallied about 1%.

Now that we’ve taken up plenty of space lauding our efforts (we wish they all went this perfectly) the question is, where do we go from here?

We continue to like long CAD positions. The absolute best time to buy a currency is when a central bank embarks on a tightening cycle. Here we are at the very precipice of what could be a long-term move higher in interest rates.

In the short-term, however, the situation might be stretched. We will definitely be holding long positions but looking to add on any weakness for a move to our target of 100. The market is struggling at the aforementioned trend resistance and we may see some consolidation down to 92.80. That would be our initial buy point. We would cover on a move down to 92.50 because that would target 92.05. If we do see a move to the low 92s, we will be adding agressively.

The very immediate-term outlook for USD/JPY is clouded by the interet rate decision from the Federal Reserve and Bank of Japan. We see the potential for a pop but will be using it to sell strength.

The Fed decides at 2:15 p.m. ET on Tuesday while the Bank of Japan will announce interest rate decision about 10 hours later. 

Neither is expected change interest rates but they could send signals that ignite the market. On Tuesday, the Federal Reserve could remove the “extended period” wording from the statement or alter it to something that shows a rate hike may no longer be in the distant future. This would be a positive for the U.S. dollar. On the other side of the Pacific, there is speculation that the Bank of Japan may announce further special measures to fight deflation, like bond purchases, when officials meet Wednesday. This would be an explicit move that devalues the JPY.  The combination of the two meetings could make for a big USD/JPY move.

From a fundamental point of view, we can see macros getting long USD/JPY. They are seeing the opportunity for a quick profit if the FOMC signals tighter policy and/or the BoJ increases bond purchases. We doubt the Fed is going to signal anything meaningful and we don’t believe that a more upbeat economic assessment and/or altering of the “extended period” language is enough to generate a lasting U.S. rally. There is some risk from the BoJ because a move to further bond purchases would be a JPY negative but we see this as unlikely.

When neither of these expectations come to pass, we will see a round of position squaring from speculators that hurts USD/JPY and furthers the technical structure of lower highs. The slow stochastic is also flashing a sell signal.

We will target 87.50 with a stop at 92.15.

The U.S. dollar was whipsawed by poor data on new home sales and testimony from Federal Reserve Chairman Ben Bernanke. The USD tumbled against the yen and then later climbed back. On the intraday chart, the pair made a toppy formation around 90.25, with further resistance at 90.35. On the downside, 90.00 is a significant psychological level.

The levels are so close together that it’s highly likely that in the day ahead, the support or resistance is will give way. When it does, the move is likely to be strong. This is futher reinformed by the doji star pattern on the daily chart.

The doji star pattern is a signal of a big move. It’s not necessary to make a directional call just yet. We would be a buyer at 90.40 and a seller at 89.80.

It’s

It has been a quiet day in the fx market today. There has been no economic data and little to jar the market out of its quiet state.

The lazy market has given us a chance to take a look at some charts and USD/JPY is flashing some interesting signals. The week-long run-up ended with a failure at the 200-day moving average on Friday. Today the market attempted another push higher but it has faded and the dollar is now in negative territory against the yen. We also have downtrend resistance and uptrend support to contend with as we search for the initiation of a medium-term trend.

We aren’t willing to commit too strongly in one direction or the other. The rejection of the 200-day moving average even as stocks have been rising is the clearest signal we have seen. However, the rejection came at the end of a strong uptend and an overbought correction was to be expected.

We think there could be another test of the 200-day moving average and we would prefer to be long is it breaks. If USD/JPY can close above the 200dma it will also likely break downtrend resistance and should test the recent high of 93.65.

 
We would turn bearish if the pair falls below 90.

Update: As expected, the pair broke to the upside of the range. It was a nice 100-pip trade if you made it. Now, we have reached our target of 91.20. We would be selling here, with a tight stop.

It was an exciting day in the forex market with the EUR, GBP, AUD and NZD rallying significantly against the dollar and yen.

Today we’re looking at a pair that avoided most of the noise and has carved out a nice, technical channel trade. We can see it here:

There are two ways to trade a channel.

1) to buy near the bottom of the range and sell near the top

2) wait for a breakout and go with it.

Our bias is to see a breakout to the upside at this point, so buying at the bottom of the range and holding until it’s clear that the top of the range is holding. If we saw a break through the bottom, however, we would be sellers.

 From a longer-term perspective, we can build a technical case for strength or weakness. We will be watching 91.20 as key medium-term resistance.

We have been keeping a close eye on the Australian dollar over the past few weeks and AUD/JPY continues to grab our attention.

Two weeks ago, we warned about the potential for AUD/JPY fall below the 200-day moving average. When it did, it immediately fell 300 more pips before finding support at the quadruple bottom at 76.35-50. It has since rebounded back above the 200 dma to 80 cents.

The move higher has relieved short-term oversold conditions and the overall technical set-up remains bullish for the Australian dollar. We would have a very difficult time going long here, however. A clear quadruple bottom is not something that you see often and it’s usually a sign that a further sustained rally is failing. What has is saying that the chart still looks bullish is the fresh high at 86.50 after the late-November test of 76.50 (a 1000 pip rally).

We don’t want to fight the long-term trend of higher highs in AUD/JPY and we have been impressed by the Australian dollar’s ability to rebound back above the 200 dma. There is no reason to think the AUD can’t go higher in the short-term. At this point, however, we see a rally above 86.50 as unlikely and that will trigger a mixed, or negative technical picture.

We do expect this pair to eventually fall back below the 200 dma and below 76.35. At that point we will be agressive sellers as we could see this pair quickly falling to 67.00.

The U.S. dollar continues to climb higher against the Japanese yen as it nears the Dec. 22 high of 91.86.

The period from April to late November saw a long, steady slide lower, culminating in the gaps lower on November 24-25 to a low of 85.00. Since then, however, the USD has rallied an impressive 600 pips.

The rebound could be seen as a retracement phase. The 38.2% retacement has already been cleared, with 50% at 93.11 and 61.8% at 95.09.

A rise to the 50% retacement converges with downtrend resistance and a minor high from early September. If 93.23 is cleared, it opens the way for a rally to 95.

In the short-term, the pair presents considerable resistance as well. If the first hurdle at 91.86 is cleared, then 92.32 show offer some stiff resistance.

We see here the significance of the 92.32 high as it was a medium-term top and led to the final leg of the decline.

The most likely scenario is a significant test of 92.32 but the multiple levels of resistance upcoming in USD/JPY likely means that the bulk of the gain has already passed.

Fundamentally, there was significant evidence that USD shorts were getting squeezed for much of December. Year-end demand has also pressed the U.S. dollar higher. Those factors are diminishing in much the same way as the chart is starting to look tired.

On the other hand, some of the U.S. dollar strength has come from optimism about a U.S. economic recovery and the sense that the Fed will hike by mid-year. The consensus has been shifting in this direction, even though we have yet to hear anything significant from the Fed.

What is clear is that the Bank of Japan will not be hiking rates any time in 2010 and likely not in the early part of 2011. If an economic recovery takes hold in places like Australia, New Zealand, Canada and even the United States. There are market participants eager to get involved in the yen-weakening carry trade.

The pound sterling was surprisingly resilient during Wednesday’s bought of risk aversion and now that the tables have turned, we have seen a remarkable run-up in the pair. Since bottoming 10 hours ago, it has shot up to 151.50 from 148.50 – a 300 pip move. About two-thirds of that came in the past two hours after the U.S. GDP report showed growth at 3.5% compared to the 3.2% expected. There is also talk of Middle Eastern buying.

The GBP crosses have all traced out more bullish technical patterns than the rest of the market, which is consolidating. On the hourly chart, we see that GBP/JPY has cracked resistance from the double top on Monday and Tuesday.

GBY/JPY hourly oct 28

We would caution that an overshoots happen and we would want to see an hourly close above 151.20 before we would be jumping in. If it does, there is no resistance all the way up to 153. On a failure, look for a quick pullback to 150 or 150.20.

Also be aware that the hourly Bollinger is far into overbought territory so bulls looking to get in will eventually get a chance.

Much of the volatility in GBP relates to uncertainly about what the Bank of England will do when policymakers meet next week. A Reuters poll of 62 economists shows 19 do not look for an further quantitative easing, 22 for an additional 25 billion pounds and 21 for an additional 50 billion pounds. The more easy money, the worse it will be for the sterling.

The Bank of England decision is Thursday, Nov. 5 at 5 a.m.