Risk aversion and the Fed’s announcement of further quantitative easing have pushed USD/JPY down through support to the lowest level in 15 years. Japanese officials expressed concerns in the Asia-Pacific session about the rising yen but that has done nothing to slow the rally. Japanese Finance Minister Noda told reporters in Tokyo that recent moves in the yen have been “a little bit one-sided.” Meanwhile, Japanese Trade Minister Masayuki Naoshima said that deciding on FX interventions is difficult in an interview with Jiji Press. USD/JPY fell as low as 84.73 but was most recently down 47 pips to 84.97. The pair fell as low as 84.83 in November 2009 during the height of the credit crisis but USD/JPY hasn’t traded below since 1995. If the pair can close below 84.83, it will be an extremely bearish signal.

A reason for the weakness in USD/JPY is that U.S. growth in the second quarter may have been far worse than the 2.4% pace that was initially estimated by the Bureau of Economic Analysis. Two surveys private economists show they are expecting more than a full point of revisions. Bloomberg has just released a survey suggesting growth will be revised to 1.2% but it’s based on just four responses. Similarly, Dow Jones has a listed consensus at +1.3% (it’s unclear how many were surveyed). After four quarters of contraction, the U.S. economy grew at a pace of 1.6% in Q4 2009 followed by quarterly readings of 5.0%, 3.7% and the most-recent 2.4% rate. It appears that growth is stalling as government stimulus fades. With momentum clearly slowing, more questions will arise about the possibility of negative growth and recession. Slower-than-expected inventory builds are a large part of the downgrade. Today’s unexpectedly large U.S. trade deficit for June will also hurt. One notable market watcher is saying today that growth could be revised to as low as +0.5%.

We expect a bounce in USD/JPY in the immediate term but will be looking to sell. We will also sell on a close below 84.83 with an eventual taget of the all-time low at 79.90.

The strongest trend in the forex market at the moment is a falling USD and rising JPY. USD/JPY has been declining for nearly 11 weeks. This will be a big week in terms of U.S. data and there is talk that Japanese officials may intervene in the market is USD/JPY falls to 85.00. Watch for U.S. data on consumer confidence, durable goods, the beige book, GDP and the Chicago PMI. If the outlook continues to darken for the U.S. economy, look for this pair to continue sliding.

U.S. Federal Reserve Chairman Ben Bernanke roiled markets last week when he uttered that “the economic outlook remains unusually uncertain.” Markets take their cues from the Fed. Remember it was Bernanke’s comment in April 2009 about “green shoots” that helped prompt a huge turnaround in financial sentiment. Many traders stand by the old adage “don’t fight the Fed.” What Bernanke’s comment meant was that they are in data-watch mode, unsure of which direction the U.S. economy is headed. “We will continue to carefully assess ongoing financial and economic developments,” he said. His comments have focused the market’s attention on incoming U.S. economic data. As a result, the U.S. dollar is moving more than usual after economic data releases. We are seeing solid rallies against the yen on stronger economic data and deep slumps on soft figures. An “unusually uncertain” market is prone to big moves whenever there is a hint of clarity. Keep an eye out for signs that make the outlook more certain, for better or for worse.

Our trading in USD/JPY has been outstanding. We have picked several turning points in a row and we’re feeling good about calling another one.

The yen is the laggard (USD/JPY strength) after an election loss for the ruling Democratic Party of Japan ramped up worries about political instability.

The DPJ, which has been ruling for one year, was beaten badly and fell to 44 seats compared to 51 for the Liberal Democratic Party. Smaller parties have already ruled out any coalitions that would ensure the 56 seats needed for a majority. The Lower House is the power-base of Japanese politics but the loss will hamper policy-makers and could stall or kill a proposed sales tax increase that would help to put Japanese finances in order.

Frankly, we haven’t been that impressed with the sell-off in JPY despite the disastrous election result. We see the recent USD/JPY strength as a standard retracement and the 50% Fibonacci retracement is already providing resistance. The measured target of the double-bottom at 86.96 has been met.

There is some talk that the DPJ’s loss could help to boost the yen. Prime Minister Naoto Kan has in the past said he is in favour of intervening in the forex market to weaken the yen in order to boost exports. Due to the election loss, there is growing speculation that the DPJ may push for a leadership change in a September party election.

Technically, the more powerful indicators are pointing lower. Sell here.

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.

USD/JPY has whipsawed over the past two sessions. General risk aversion and a strong USD 2-year note auction hurt the big dollar over the past day.

The former wedge formation has now clearly broken to the downside. We have been patient with this trade, waiting for a clear sell signal and fell like it has now arrived. We are below all the major moving averages and support is tenuous.

The big news in the day ahead will the FOMC interest rate decision at 2:15 p.m. ET. This is one of the least-anticipated decisions in recent years but it will still generate a market reaction. It’s virtually set in stone that the Fed will leave rates between 0 and 0.25% and keep the “extended period” language. The focus will be on the economic sentiment. With U.S. housing starts expected to fall by nearly 100K when the data is released later today, it’s safe to say that the Fed will have to take out the line that says housing starts “have edged up.” The employment assessment could also be downgraded and that would weigh on USD/JPY.

Dollar-yen has been a frustrating pair to trade recently. It can’t seem to find any strong direction. Just when it looks like it’s going to rally or plunge through support, it heads in the other direction. In essence, we have been trading between 89 and 95 since the start of the New Year.

In the longer-term, we expect the pair to eventually trend lower but at the moment, the trend is clearly sideways. In a sideways market, sometimes there are opportunities to put on a low risk trade that takes advantage of a short-term trend. That’s exactly what we see right now in USD/JPY.

This pair sold off on Friday from 93 to 91 but it has rebounded and consolidated in quiet trading today. This is a classic fibonacci retracement. The high earlier of 92.07 is precisely in “The Box” which is the zone between the 50% and 61.8% retracement. We think the spot rate, at 91.64 presents an excellent value on the short side.

Stochasics are showing an overbought signal on the daily and hourly charts with both in the process of rolling over. From a risk management perspective, the trade also presents good value. A stop at 92.15 is a 50 pip risk while on the downside, there is no significant support until 90.54.

No one is talking about USD/JPY because nothing much as happened in the pair over the past two weeks. What we see is a pair that is ready to make a big move.

For the past week USD/JPY has been locked in a 200 pip range between 90 and 92. The past three sessions have traced out doji stars and the week earlier also displayed a series of indecisive patterns.

It’s time for the market to make a decision on USD/JPY. We believe the trade is to buy on a break above 91.87 and sell on a fall below 89.91 but we also want to develop a bias.

To us, the downside looks more attractive for a short-term trade. The plunge on May 19 was the last major technical move. As such, we are noting that 91.87 (the high from that day) is a significant point of resistance. From a risk/reward perspective, we are only 50 pips from that high but a 135 pips from our most significant support level. That alone makes us baised to trade this from the short side. What’s more is that the slow stochastics appear ready to start turning over.

On the whole, we want to stay nimble with this pair. We think the next move is going to a big one and we are prepared to give up an early portion of the gains in order to ride the momentum. Keep a close eye on USD/JPY over the next 24 hours.

The U.S. dollar made strong gains against the yen on Monday but was unable to close above a key resistance line. The pair briefly traded at its highest since August but gave back a portion of its gains to close below of the April high of 94.69.

We remain long CAD/JPY but note that even though CAD was the leader in the forex market today and JPY was the laggard, the pair was also unable to break out.

In any case, the price action was short-term bullish. Friday’s slump in stocks and late-day plunge left us questioning our negative JPY bias. It also set up a bearish spinning top formation on the daily charts. Monday’s trading neutralized that though and painted a conditionally bullish picture.

The key in the day ahead remains the resistance at 94.69 stretching up to 94.78. If we see some stops blown out we will be encouraged. What makes us hesitate, however, is that Japan is on holiday until Thursday because of the Golden Week festivities. Holiday trading is treacherous and prime for false breakouts.

If the market fails to make a clear break above 95 before Thursday’s Asia-Pacific session we will be very cautious. The Golden Week is traditionally a down time for JPY so we are on guard.

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.